Jimond Wong, Manulife Asset Management
Over the past few years, a number of Asian bond issuers actively raised money. These bonds normally have a maturity of less than three years, meaning that many corporates in the region are seeking to refinance their bonds.
However, Wong warned about the risk of more high yield bond default cases emerging in 2018. He explained that the credit market is becoming less favourable to the weaker companies because of the tightening of market liquidity across the region.
The year-to-date default rate of Asian high yield bonds is 1.3%, but Wong said the rate is likely to grow to 3%, surpassing the high level in 2015.
“Some of the high yield issuers in Asia are unable to issue new bonds in the local bond market so they can only seek to refinance to settle their outstanding debt.
“However, there are limited viable options for them as the bond buyers prefer sticking to the stronger companies, leading to an unaffordable funding cost for the junk bond issuers,” he said.
Some of the high yield issuers in Asia are unable to issue new bonds in the local bond market so they can only seek to refinance to settle their outstanding debt
Therefore, more high yield bond issuers are expected to go default either this year or 2019, he added. He said the default cases may come from China’s small-scale private property developers, industrial companies or some issuers from India. But the companies with a higher probability of default take up only a small portion of the whole credit market.
Large scale preference
Currently, he holds an overweight position in high quality Chinese property developers, which are typically delivering an 8-10% yield in the US-denominated bonds, he said.
“Many real estate developers with a rating of B or BB are quite large in scale, giving themselves more access to different types of funding, including bank loans and equity markets. Their cash flow also remains healthy. We are not so worried about their ability to request refinancing,” he said.
Other large scale companies, such as state-owned enterprises, also stand to benefit from a tightening market environment, Wong believes.
Despite the likelihood of more bond defaults, Wong remains positive on Asian economies, though he singled out countries with substantial exports of commodities.
“Resilient commodity prices give us a lot of comfort to expect better economic fundamentals in Southeast Asian countries during the second half of 2018.”
Asian high yield bond default rate
Data: JP Morgan, Manulife Asset Management. As of the end of May 2018.