As the debt market within Asia-Pacific navigates through the uncertain economic backdrop of the Covid-19 pandemic and rising fixed-income benchmark yields, opportunities abound, within a surprisingly sedate credit landscape.
Extreme volatility may yet beckon but for the time being the emphasis among market players has been for non-banks to enter a stage vacated by bank lenders amidst a dynamic of profound disintermediation.
“Within the distressed debt universe, the impact of the Covid-19 pandemic has been limited so far and the long-term cycles of that market continue to apply,” says Michel Lowy, founder and CEO of Hong Kong-headquartered global banking and asset management group SC Lowy.
“Yes, default rates have been going up, but that is partially a reflection of pre-existing business conditions, not the pandemic. Certainly, there have not been the opportunities one might have reasonably expected. International banks have withdrawn to focus on their local markets and regional banks have become more risk averse, even within the context of a faster economic rebound from the pandemic than seen in the West.”
Still, many are nervous about this apparent “homeostasis” in the debt markets. Rising headline inflation in the United States, fears of a withdrawal of asset purchases by the European Central Bank under its 1.85 trillion euro (US$2.26 trillion) Pandemic Emergency Purchase Programme, as well as the lifting of debt moratoria within APAC and nerves about a raft of looming China debt refinancing wait in the shadows to potentially usher in a period of extreme risk aversion.
“For cross-border funding, we are watching the potential impacts of the reflation trade on not only benchmark rates but also on investor demand. Beyond that, concerns about the string of defaults in China could potentially spill over and put upward pressure on high-yield funding costs more broadly as well,” outlines S&P’s Global Ratings team in a recent research note on the global credit backdrop.
An unprecedented US$1.8 trillion of bonds are set to mature within APAC over the coming months – according to data from Refinitiv – with the bulk originated in China, India and Australia and a hefty burden of US$283 billion presented by deals from the offshore dollar market.
The worry for the final half of the year is that much of the refinancing has already happened in the first half and eaten up available demand. A clear example is South Korea, where a rush to refinance outstanding maturities produced almost US$19 billion of issuance in the first half, or double the issuance for the same period last year.
Meanwhile, China’s debt market has set some uneasy precedents this year in the form of loan repayment misses from Chongqing Energy, which sent the company’s bonds plummeting 20 points into distressed territory, prompting fears of the same within the state-owned enterprise and local government financing vehicle sectors.
And business park developer Yida China Holdings’ default on US$225 million of paper earlier this month has also cast a cloud over sentiment towards offshore China real estate debt. The unease is well placed: of the record-breaking first-quarter defaults of US$15 billion registered in local and offshore debt markets by Chinese issuers, almost 30% originated from the real estate sector.
Nevertheless, despite this building unease, private lenders to APAC have been grasping the opportunity within the apparent prevailing calm.
“What we have seen has been a massive increase in demand for private debt financing within the mid-cap corporate sector. In APAC, there is an abundance of mid-sized corporates which have limited access to the capital markets,” says Lowy.
“Because of this dynamic, the private debt market in APAC is poised for exponential growth and is set to become a significant critical mass asset class. Double-digit yields are achievable for investors – an unimpeachable attraction, given the ongoing global quest for yield – and the relatively short duration typical of private deals of just 1-3 years is a compelling proposition.”
Non-bank lenders have stepped into the space vacated by international and local banks (due to heightened risk aversion) and have been providing financing in short-duration vanilla format, as well as via the purchase of distressed paper.
“The biggest markets for distressed debt are China and India, and in the former case we are witnessing an overarching dynamic of deleveraging and restructuring in the corporate sector. In India, there has been a debt moratorium which has provided a temporary hiatus. Once the Indian government lifts that moratorium, banks will be free to call corporates into default and that will be a game changer,” says Lowy.
Earlier this month, the Reserve Bank of India unveiled new debt moratorium measures to allow borrowers more time to repay their debts, a much-needed measure in the face of economic sclerosis caused by a surge in Covid-19 cases within the country and consequent wide-ranging lockdowns. “There is abundance of future financing opportunities available, sometimes for size as large as US$100 million as companies use this financing to return to ‘normality’.”