12 September, 2017
Introduction
The first half of 2017 saw a sharp year-on-year increase in issuances of high yield bonds in Asia (ex-Japan) from US$9.2 billion in H1 2016 to US$53.5 billion in H1 2017[1], driven by a global demand for yield and companies looking for funding or refinancing opportunities at lower cost, particularly Chinese real estate developers. The real estate sector comprised US$24.6 billion of the US$53.5 billion of high yield bond issuances. China continues to account for approximately half of the issuance in Asia-Pac but activity in India and Indonesia has increased year on year. Australia has seen two issuances compared to one deal in H1 2016, one by repeat issuer FMG Resources (August 2006) Pty and the other by a debut issuer Barminco Finance Pty Limited.
The outlook for offerings in the second half of 2017 remains uncertain following a handful of cancelled deals in July, including China’s Lionbridge Capital Co., Limited and Indonesia’s Geo Energy Resources Limited, and in light of ongoing geopolitical events affecting the region and the markets at large.
In this update, we discuss the general trends and key developments in the Asia-Pac markets.
Highlights
High yield covenant packages continue to be more robust than in the US or Europe although there is selective loosening at the top ends of the credit spectrum
The market was open for better-known or repeat names but debut issuers faced challenges coming to market
Country-specific structures continue and are affected by regulatory frameworks, particularly in China (onshore guarantees) and India (discontinuation of Masala bond structures)
China
In H1 2017, 62 deals raised a total of US$32.2 billion, up from 15 deals worth US$4.1 billion in H1 2016. The Chinese high yield market has historically been dominated by real estate developers who have turned to the offshore market due to the borrowing regime within the PRC for real estate companies. However, since September 2015, the National Development and Reform Commission (NDRC) has tightened restrictions on offshore debt issuance by implementing a pre-incurrence registration and post-incurrence filing system under which Mainland enterprises are required to apply to the NDRC for registration prior to the issuance/borrowing of offshore debt with tenors longer than one year.
Non-investment grade issuers face increasing difficulty completing the NDRC registration against the backdrop of the Government’s deleveraging campaign, leading to a few issuances of 364-day bonds by Chinese companies in order to circumvent the delay in obtaining approval. However, international ratings agencies often do not rate short-term debt, so these notes are usually only attractive to private banks and private-wealth buyers, and less so to buy-and-hold institutional investors. This trend towards short-dated bonds also opens up such companies to shorter term refinancing risk than would be usual in a high yield bond with a typical tenor of 3, 5 or 7 years.
We continue to see an increase in bonds issued with onshore guarantees (Reward International Investment Ltd, 7.25% Guaranteed Senior Notes due 2020; Shandong Yuhuang Chemical Co Ltd. (Rock International Investment), 6.625% Guaranteed Senior Notes due 2020). China’s State Administration of Foreign Exchange (SAFE) rules promulgated in 2014 allow the granting of guarantees and other types of security by onshore companies, subject to fulfilment of certain criteria. The Chinese bonds with full high yield covenants issued offshore in H1 2017 were offered on a Regulation S basis and were almost all NY law governed, reflecting growing liquidity in the offshore markets.
Indonesia
In H1 2017, 12 deals raised a total of US$7.5 billion, up from two deals worth US$2.9 billion in H1 2016. The Indonesian high yield market is opening up again as a result of stabilising economic conditions and commodity prices, after a relatively muted 2015 and 2016. More than half of the deals done in H1 2017 were by repeat issuers. As a commodity-driven economy, the demand for issuances by commodity-related companies such as those in the oil and gas and coal sectors has increased with the improvement in commodity prices. However, the industry sectors utilizing high yield bonds as a part of their financing structure continues to expand, including agri-livestock and textiles. In contrast with 2016, fewer deals in H1 2017 included a ratings decline trigger as part of the change of control provision, signalling a potential tightening of covenant packages in Indonesia on this point.
India
In H1 2017, six deals raised a total of US$3.1 billion, up from one deal worth US$0.3 billion in H1 2016. However, in June 2017, the Reserve Bank of India (RBI) introduced new restrictions on the issuance of rupee-denominated bonds overseas (commonly known as Masala bonds) to align them with the standards applicable to other kinds of external commercial borrowings. The implementation of the rules will prohibit structures like ReNew (ReNew Power Ventures Private Limited – Neerg Energy Ltd, Senior Notes due 2022) but does not affect other structures, such as those in Greenko Dutch BV and Azure Power Energy Ltd. Further regulatory changes were announced in July 2017 when the Securities and Exchange Board of India (SEBI) also announced restrictions on the sale of rupee bonds to foreign investors to prevent a breach of the foreign investment ceiling. These restrictions continue to be in force.
Indian deals have seen some loosening of certain covenants particularly in relation to restricted payments. For example, Samvardhana Motherson Automotive Systems Group B.V.’s deals in 2016 and 2017 permit an unlimited amount of certain types of restricted payments subject to compliance with a stated Combined Leverage Ratio. Marble II has a number of bespoke restricted payment carve-outs and Greenko permits restricted payments so long as there is no default and the issuer can incur US$1 of debt under the ratio test. Motherson, Marble II and ReNew included a 40% equity claw instead of the usual 35%; and ReNew is the only debut Indian HY deal in H1 2017 with a 90% consent threshold for changes to fundamental terms. In terms of industries, we are seeing a wider range of issuers in the high yield market in India, which historically ranged from IT to Pharma but is now expanding into agricultural and renewable energy sectors. The Indian Government has set a target to provide 40% of all electricity from renewable sources by 2030.
Despite the rupee becoming less volatile in recent years partly due to RBI intervention, currency hedging continues to be an important feature of Indian high yield bonds.
Australia
In H1 2017, two deals raised a total of US$1.8 billion, up from one deal worth US$500 million in H1 2016. The Australian high yield market remains small given the liquidity available in the banking markets in the region. FMG, a repeat issuer in the region, is moving towards an investment grade covenant structure with many of the standard high yield covenants being deleted in its latest US$1.5 billion offering, split over two tranches, as compared to its previous deal in 2015. Barminco, a gold mining company, also accessed the HY markets with a more typical high yield covenant package. It does however have an unusual one time only equity claw in certain circumstances, set at 101%.
Trends to watch :
- Covenant packages being affected by other markets
- Changes to regulatory frameworks
- New sectors
[1] Debtwire – APAC (Ex-Japan) USD Corporate High Yield Bonds League Table. Excludes all AT1s, Perpetual Capital Securities for IG rated issuers, issuances sold to a single investor and issuances with a tenor of 18 months or less.
For further information, please contact:
Anna-Marie Slot, Partner, Ashurst
anna-marie.slot@ashurst.com
