New World Development’s interest payment deferral could depress already weak investor sentiment for Hong Kong credit, according to Morningstar’s Arvind Subramanian.
After rebounding sharply in 2024, Asian high yield bonds could see weakened returns and slowing fund flows due to New World Development’s (NWD) payment deferral.
When the Hong Kong property developer announced the deferment of interest payments on its perpetual bonds on May 30, its bond price fell sharply alongside its shares.
Due to NWD’s relatively large size in the Asia high yield bond market (2.5%), returns and fund flows are likely to be weak in the near term, according to Arvind Subramanian, senior analyst, manager research at Morningstar.
“An overwhelming majority of Asian bond funds entered the year with an underweight stance on Hong Kong credits, driven by growing concerns over NWD’s deteriorating credit profile,” he said in a recent note.
“The decision by many managers to trim their bond holdings over the past year has proven timely, as recent developments highlight NWD’s tight liquidity position and are likely to further dampen already fragile investor sentiment toward the region.”
Some funds still exposed
However, not all Asia high yield bond funds have trimmed their exposure to the troubled property developer.
Some Asian high yield bond funds held relatively large stakes in NWD bonds at the end of April 2025, according to Morningstar.
As of the end of April, the LO Funds Asia Diversified High Yield Bond fund had a 4.6% weighting to NWD, and the PineBridge Asian High Yield Bond fund had a 3.5% weighting.
Whereas the broader JPMorgan Asia Credit Non-Investment Grade Index had an approximate weighting of 2.5% in NWD bonds as of March 2025.
Other funds such as Pimco GIS Asia High Yield Bond, and BNP Paribas Funds Asia High Yield Bond, also held stakes in NWD that were close to or larger than that exposure by the end of April, according to data from Morningstar.
The Asia high yield bond category held approximately $160m worth of bonds in February 2025, although this value is likely to have declined since then.
When it comes to broader Asia bond funds, which typically hold between 15% to 30% in high yield bonds, most funds have had a relatively lower exposure to NWD, according to data from Morningstar.
However, there were some exceptions: Oclaner Asian Bond held a 5.2% stake in NWD’s debt at the end of April, while LO Funds Asia Value Bond held a 2.5% position.
Looking ahead, Morningstar equity analyst Jeff Zhang said he expects NWD to prioritise refinancing its bank loans by July over its accumulated coupon payments which can be deferred.
“We think the refinancing should go through, though banks may require higher interest rates and additional collateral, such as Victoria Dockside,” he said.
“NWD’s deleveraging progress hinges on property sales in Hong Kong and mainland China.”
“While the recent acceleration in home sales has provided some relief, we anticipate a longer recovery period for the segment’s profitability, as home prices gradually stabilize.”
Subramanian said that investor concerns over NWD’s credit profile, along with a weak property sector’s potential spillover effects on the broader economy, had already prompted many funds to trim their Hong Kong exposure.
“Recent events are likely to further temper fund managers’ sentiment toward the region,” he said.
