As Korea Tensions Rise, Asia Junk-Bond Deals Keep on Rolling

Asian bond investors are taking the latest geopolitical tension in their stride as more companies line up to sell junk-rated dollar notes this week.

Indonesian oil explorer PT Medco Energi Internasional is preparing to offer five-year bonds to help refinance existing debt, according to people familiar with the offering. Developer Greenland Holding Group Co. and China Huiyuan Juice Group Ltd. are both selling three-year notes. The three are expected to price their offerings as early as today.

They will add to a record pace of high-yield corporate dollar-denominated bond sales in Asia totaling $38 billion so far this year, according to Bloomberg data, with Chinese companies making up more than 66 percent of the issuance. The broader junk-bond market hardly flinched on Wednesday, as index spread widened a mere 3 basis points, after President Donald Trump stoked tension with his fire-and-fury comment regarding North Korea.

Chinese developer Agile Group Holdings Ltd. priced $200 million of five-year notes on Aug. 7 in its first return to the market since May 2015. It attracted more than $2.5 billion of orders from money managers. Another developer, Country Garden Holdings Co., sold an additional $100 million of its 2022 notes yesterday.

The Pipeline

“The pipeline remains as strong as ever,” said Gordon Ip, head of fixed income at Value Partners Hong Kong Ltd. “But it’s not a seller’s market. Some issuers were too aggressive in terms of pricing and covenants, and have been pushed back. They have had to bring something better or more realistic.”

Medco, which is buying back its S$100 million ($73.3 million) notes, has $55 million of existing bonds maturing in November 2019, according to Bloomberg data. China Huiyuan Juice has 200 million euros of notes due in July 2018 and $150 million of notes due in April 2019. Greenland has four bonds worth $1.62 billion maturing within 12 months.

Junk bond sales in the region remain unabated even after three canceled deals in late July raised concerns that the rally might be losing steam. Indonesian tire maker PT Gajah Tunggal last week became the lowest rated issuer to sell dollar bonds since coal producer PT Indika Energy came to the market in April. The company’s credit rating was upgraded after the deal on improved cash conditions.

Indeed, so many deals are coming that Charles Macgregor, head of emerging markets at Lucror Analytics in Singapore, fears some of the bonds sold by debut issuers may not perform so well.

He said he hopes there won’t be a jump in defaults triggered by company-specific challenges at the same time that geopolitical tensions with North Korea are on the rise.

Yields on Asian junk bonds are steady so far this week, after rising 7 basis points last week, according to JPMorgan Indexes. The region’s high-yield bonds handed investors a return of 4.05 percent this year, while investment-grade notes gained 4.14 percent.

Bloomberg News
August 10, 2017, 08:57:18 GMT
Reporting by David Yong and Carrie Hong; Editing by Neha D'silva, Christopher Anstey and Colin Simpson