A $100 Billion Comedown: Soaring Defaults Shrink Asia’s Junk-Bond Market

Since then, a spate of defaults and a massive selloff have resulted in big losses for investors, erasing more than $100 billion in value from one widely watched bond index. The total market value of Asian high-yield bonds—excluding defaulted debt—is now about $184 billion, according to data from Bloomberg and Barclays Research.

“This is completely unprecedented, especially for Asia credit markets,” said Avanti Save, managing director, Asia credit strategy at Barclays.

Ms. Save said the entire high-yield Chinese property sector was trading as if it were in financial distress; 60% of the bonds of developers that haven’t defaulted are trading at under 40 cents on the dollar.

While investors have recoiled from all manner of riskier assets this year, including fast-growing technology stocks and U.S. junk bonds, the problems in Asian’s high-yield market are distinct and longer-running.

The market’s comedown followed years of rapid growth. Chinese corporate borrowers, including real-estate companies such as Evergrande and Kaisa Group, took advantage of low interest rates and funds flowing into the region to raise large amounts of dollar funding. In January 2020, Evergrande and a key subsidiary sold $6 billion of bonds in a few days, pointing to the market’s growing depth.

Money managers including

BlackRock Inc.,

Pacific Investment Management Co. and UBS Asset Management had also promoted the merits of investing in Asian high-yield bonds, favoring the assets for their attractive returns and low historical default rates relative to junk bonds in the U.S. and other parts of the world.

That all changed after Chinese regulators imposed limits on developers’ leverage, which forced Evergrande and some of its peers to curb their borrowing activities. Housing sales began to dry up too, and a funding crunch ensued. Investors dumped many developers’ junk bonds, sending prices tumbling and yields soaring.

Evergrande and Kaisa defaulted on their dollar debt in December, the two largest among more than two dozen Asian high-yield issuers that have defaulted on their international debt since the start of 2021, according to Goldman Sachs data.

When companies default, their bonds are removed from global bond indexes, reducing the benchmarks’ total face value and market value.

The yield on a widely followed ICE

BofA

index of Asian high-yield dollar bonds was recently 15.1%, versus 7.8% a year ago. That yield was 23.6% for a similar index for Chinese companies. The broader universe also includes junk-rated sovereign bonds from countries such as Pakistan and Sri Lanka, as well as bonds issued by Asian energy companies and Macau casino operators.

Chinese companies’ debt made up more than half of Asia’s junk-bond market a year ago. Now, it makes up a much smaller proportion of the Asia high-yield market. “It’s hard to replicate the contribution that China property had,” said Sandra Chow, co-head of Asia-Pacific research at debt-research firm CreditSights. She added that more defaults could occur before the market’s bottom is found.

The fallout has also affected demand for new bond deals. In the year through May 10, Asian high-yield issuers sold just $2.5 billion in debt, down 90% from $24.2 billion in the same period in 2021, according to Dealogic. That compares with a 73% year-over-year decline in U.S. high-yield issuance, the data shows.

Rishi Jalan,

Citigroup Inc.’s

Asia debt syndicate head, said that while there have been some recent bond deals from renewable-energy companies in India, overall investor demand in the high-yield market has been relatively weak.

“Investors have been feeling the pain in China real estate, and it’s repricing everything,” Mr. Jalan said, adding that the headwinds could take a while to dissipate.

He said present yields—coupled with rising U.S. interest rates—have made it uneconomical for many corporate borrowers to sell new dollar bonds. Some companies have hence decided to raise funds in other ways, such as via the private loan market.

Amy Kam, a senior portfolio manager at

Aviva Investors

in London and a veteran in Asian credit, said she remains hopeful that conditions in Asia’s high-yield market will improve.

“There will be survivors,” she said, referring to China’s property sector and its importance to the Chinese economy. “We are trying to stay with the stronger companies that we think can withstand the downturn.”

Write to Serena Ng at [email protected]