Investors interested in acquiring the skills needed to succeed in an opportunity-rich asset class should not venture into the Asian high-yield market without this comprehensive and authoritative guide. It provides both the credit tools that apply everywhere and a deep understanding of unique aspects of the Asian market that could blindside the uninformed investor.
Annual issuance of Asian high-yield bonds jumped from under US$5 billion in the early 2000s to approximately US$12 billion to US$16 billion over 2010–2012. Demand for the paper boomed in 2012–2013 as investors seeking to deploy massive global liquidity encountered rock-bottom interest rates in the United States, Europe, and Japan. The time was ripe for an update of A Guide to Asian High Yield Bonds: Financing Growth Enterprises , originally published in 2008.
Returning as author of this new, second edition is Florian H.A. Schmidt, a 20-year veteran of Asian debt capital markets. Schmidt is managing director and head of debt capital markets (Asia) at ING Wholesale Banking, based in Singapore. He complements the investment banking perspective that he brings to his authorship with interviews of issuers and buy-side analysts.
The book supplies all the basics for investing in Asian high-yield bonds. It includes a well-thought-out pricing model and an excellent guide to bond covenants. A section on credit ratings provides both average financial ratios for the various rating categories and a rundown of important qualitative inputs to the rating process. The author devotes a full chapter to workouts on distressed companies, featuring several helpful case studies.
Schmidt is candid about the challenges that investors face in this comparatively immature market. For instance, proper diversification is difficult because Asian high-yield bonds are excessively concentrated in Chinese issues, particularly the property sector. With many issues having few if any industry- or country-based “comparables,” establishing relative value is problematic. Hedging is theoretically possible, but the best available instrument for that purpose, the iTraxx Asia ex-Japan High Yield Index, contains issues that do not match typical high-yield investment mandates (e.g., sovereign bonds, zero-coupon convertibles, and defaulted securities).
These stumbling blocks are not entirely unlike those encountered by investors in the early days of the now $1.25 trillion US high-yield market. Over time, growth in the Asian high-yield market should produce a more heterogeneous universe of issues. The US market, however, did not have to contend with multiple bankruptcy codes and widely varying legal environments. Those factors greatly hamper cross-border value comparisons in Asia. Schmidt goes so far as to say that “it is fair to conclude that the ‘Asian high-yield market’ as a single entity does not exist.” Somewhat chillingly, he adds, “It is next to impossible to quantify the risk of Indonesian court rulings that have declared entire debt obligations null and void and delivered judgments against lenders and other transaction participants in amounts exceeding the original proceeds of the debt issued, and issued injunctions prohibiting noteholders from enforcing their rights under the transaction documents.”
Positively, a guest chapter by Jeannie-Marie Noye, Alexander Dill, and Laura Acres finds that Asian high-yield covenants are among the world’s strongest. The three Moody’s Investors Service analysts base that conclusion on the rating agency’s proprietary covenant quality (CQ) scoring system. They attribute Asia’s superior covenants to the comparatively undeveloped state of the market. With fewer built-in legal and regulatory safeguards in Asia than in the United States or Europe, investors require stronger protection through covenants.
The Asian high-yield market must also overcome the legacy of prominent failures, amid allegations of fraud, by such issuers as Hong Kong–listed aluminum extruder Ocean Grand and lumber producer Sino Forest. Again, the US market’s history suggests that such obstacles are not insuperable. The great debacle of 1989–1990—highlighted by the collapse of the largest high-yield underwriter of the time, Drexel Burnham Lambert—is ancient history by now.
To Schmidt, however, Drexel Burnham Lambert’s story, including its earlier successes, merits rehashing. He presents a reasonably balanced account, acknowledging that the leader of the company’s high-yield business, Michael Milken, pleaded guilty to six felonies and noting that “Milken’s admirers often claim that his conviction was somehow the result of enmity from big business and its friends in the U.S. government, who were frightened by the use of high yield in hostile takeovers after 1984.”
Schmidt also recapitulates the US high-yield market’s pre-Drexel history. He alludes to academic findings that the yield premium on speculative-grade bonds was far out of proportion to their default rate. Schmidt relies primarily on Glenn Yago’s Junk Bonds: How High Yield Securities Restructured Corporate America (New York: Oxford University Press, 1991). A 1994 FAJ article,1 however, showed that the oft-invoked but infrequently read “Hickman study”2 was a less enthusiastic endorsement of high-yield investing than is generally believed. In any case, the “extra” yield premium has proved to be warranted by the relative illiquidity of high-yield bonds, which have not outperformed better-rated bonds on a risk-adjusted basis.
Most readers of A Guide to Asian High Yield Bonds , however, will be less interested in learning financial history than in acquiring the skills needed to succeed in an opportunity-rich asset class. They should not venture into the Asian high-yield market without Florian Schmidt’s comprehensive and authoritative guide. It provides both the credit tools that apply everywhere and a deep understanding of unique aspects of the Asian market that could blindside the uninformed investor.
—M.S.F.