While this may sound like excessive exuberance, reflecting the thirst for yield around the world, Asian high-yield is an established asset class and not just a passing fancy. In the previous five years, the share of high-yield issuance in Asian USD bonds has ranged from a low of 27% in 2012 to 53% in 2010. Traditionally, these figures have included bonds from Philippines and Indonesian sovereigns, as both used to be rated below investment-grade. But what is new is that the high-yield market share in Asia is rising even after these countries have been upgraded to investment grade.
Certainly, some of the development around the fringes of the Asian high-yield market is fueled by the global wave of liquidity. We have recently seen more issues of perpetual bonds, many of which have disappointed investors. We have also seen "CCC" rated issuers being able to issue new bonds this year - a first for the Asian bond market. More innovative (and riskier) structures have also managed to go through. But not all of Asian high-yield market growth is froth. There are many solid businesses and repeat issues that are accessing the market.
The challenge in the Asian high-yield segment is how to balance the weight of China, particularly the Chinese property sector. After the spate of corporate governance scandals in the equity and bond markets involving Chinese non-property industrial companies, the market had grown wary of these issues, but is beginning to open up to them again. This year, China has issued 52% of all the high-yield bonds. While the FT article talks about non-Chinese issuers emerging slowly, diversification still remains a challenge for Asian high-yield portfolios. Indonesian high-yield is picking up again, after the market had been smothered for a long time by impractical rules that required the issuers to take the approval of shareholders for the bond issue, including the proposed yield!
While there are challenges to the growth of Asian high-yield, it is a product here to stay and grow.