[Awarded] Looking ahead to Asian high yield bond

高腾国际

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Live broadcast transcript (Part 1) | The Fixed Income Group is here, and you can enjoy Asia's high profits in one article! (Current situation section)

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[Fixed Income Peak Dialogue: Taking the pulse to nugget high returns in an extraordinary year]

Live replay:
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Guest lineup

Hou Mingwei, Managing Director of Gao Teng International and Head of Fixed Income Investment

Zhang Jihao, Head of S&P Global Ratings Greater China Corporate Rating

Li Chao, Executive Managing Director of China CITIC Bank (International) and Head of Global Financial Markets Department

Tang Haili Credit Bond Trader at Standard Chartered Bank (Hong Kong)

From rating to debt issuance, trading to investment, understand Asia's high-yield situation in all aspects

I. Comparison between high yield quality and long-term risk-return in Asia

Zhang Jihao: Asian high-yield bonds have higher yields and lower default rates.

Zhang Jihao:Compared to other regions, the high-yield market in Asia has two characteristics: (1) higher yield and (2) lower default rate.

The average yield of high-yield corporate bonds in other emerging markets is about 6%, and in Asia about 7%; the default rate of global high-yield corporate bonds was about 5.5% last year, and about 4.4% in Asia. International investors still don't know much about Asia and China, so they haven't lowered Asia's yield to the point of assimilation with other regions. This phenomenon is more common in China. Although China's macroeconomic control is relatively stable, relatively one-sided news in some international media has led to deep misunderstandings among investors outside Asia. However, China accounts for 50-60% of the high-yield market in Asia, and the key to investing in high returns in Asia is to require professionals with a deep understanding of China.

Hou Mingwei: Since 2006, the average yield of high yield in Asia is 7.2%, which is suitable for long-term investment.

Hou Mingwei:Since 2006, Asia's high-yield average yield has been 7.2%, and at the present time, it is also more attractive than the US (about 3.9%) and Europe (about 2.8%), providing a good coupon return; in the past 10 years in a global low interest rate environment, earnings tracking was a long-term investment trend, and it can also help investors diversify risk and optimize asset allocation.

II. Supply and investment opportunities in Asia's high-yield primary market

Li Chao: Asia's high-revenue scale is growing rapidly, reaching 80 to 100 billion US dollars.

Li Chao:

1. Asian high-yield dollar bonds have experienced rapid development and growth in the past 5 years, from over 20 to 30 billion US dollars in 2016 to around 80 to 100 billion US dollars in the past two years;

2. China's high-yield sector accounts for 80%. Among them, the real estate sector accounts for the absolute main force. In addition, it also includes non-real estate, such as commodities, chemicals, gaming, car rental, and some local urban investment enterprises and perpetual bond issuance;

3. Other regions, such as real estate and coal mines in Indonesia, new energy and steel in India, real estate, energy, and integrated groups in the Philippines.

In general, what kind of industry sector/fundamental factors will new issuers be met with enthusiastic market reactions to achieve favorable pricing and oversubscription?

Li Chao: Rent-a-car, commodities and other industries may usher in better opportunities.

Li Chao:Chinese dollar bonds have experienced some credit risk incidents in the past six months, and there have also been some major fluctuations in the popular real estate sector in previous years. Now there are some good opportunities for the non-real estate sector, such as car rental, commodities, etc. The market and investors prefer to pay more attention to the company's own fundamentals and cash flow situation. Among listed companies, various industry leaders and relatively high asset quality and stable cash flow companies.

Hou Mingwei: Starting a new business is only a tactical operation; high returns in Asia still require strategic investment.

There are two sources of fixed income income. One is Carry, and the other is Capital Gains, coupons, and capital gains. The risk of taking coupons should be spread out enough. Don't put them all in one check or two notes. If there are 100 or 200 bonds in the package, the impact of a single bond on the portfolio is relatively small. As for capital gains, we will focus on a few investment targets and try our best to get an alpha opportunity of 10-20 points.

Overall, breaking new ground is a tactical operation that increases overall excess profits to a certain extent, but at the end of the day, it is necessary to build a strong safety cushion.

III. Asia's High Yield Rating and Credit Investment System

Zhang Jihao: Comprehensive risk assessment, corporate business, finance, governance, background support, etc. jointly create a rating system.

Zhang Jihao:S&P's corporate credit rating method has a long history and has been tested by all walks of life and markets around the world. We study and review risks at all levels of the company. The main ones are: business risk: including national risk, industry risk, market competitiveness and position; financial risk: including cash flow, leverage ratio; adjustment factors: including diversification/business portfolio, capital structure, financial policy, capital liquidity, quality of company management/governance, strengths and weaknesses compared to peers; and finally, consider group or government support factors.

Hou Mingwei: Choosing a friend depends on character; choosing a company depends on “trustworthiness.”

Hou Mingwei:I started my first job as an analyst. Mainly corporate debt, mostly with high returns. I think it's really difficult and requires effort; I really need to consider the underlying risk of default. In fact, when it comes to investing in bonds, I don't think it's enough to just analyze the fundamentals, because everyone looks at these data, and the conclusions they get are often similar. However, examining the quality and intention of a company is a subjective ability, and this is what distinguishes it from others. Just as we look at character when choosing friends and employees, we look at “trustworthiness” when choosing a company.

IV. Types of high-yield investors in Asia and liquidity in the secondary market

Deng Haili: Asia is booming with high returns, and the investor base is rich and diverse.

Deng Haili:The investor hierarchy of Asian high-yield dollar bonds is richer than the domestic bond market, which is dominated by bank funds, and there are greater differences in investment opinions and risk appetite. Moreover, foreign dollar bonds also have a more complete long and short trading mechanism, benefiting from the larger trading volume and less price fluctuations of Asian high-yield dollar bonds.

Types of investors include:Private banks, family offices, hedge funds, brokerage self-operated, public funds, corporate fund management, insurance funds, bank self-operated, structured notes investors.

The entire Chinese stock of high-yield bonds accounts for about 70% of all of Asia. The trading volume is relatively large, and even high-yield transactions are higher than investment-grade, and the liquidity requirements for underlying assets are high. Overall, the main challenges in matching different types of investors are:

1. Risk appetite varies, resulting in differences in bid-ask price spreads, and sometimes even negative bid-ask price spreads.

2. The underlying liquidity of bonds also does not match risk appetite (too much capital concentrates on buying a single bond/bond from a single issuer)

3. Short-term trading is uneven after a risk event occurs. How to find price anchors and match trading orders in a short period of time.

4. How to execute large transactions while reducing price shocks.

However, overall, due to the rich level of investor types, such as hedge funds, private banks, etc., differences in market views still support market activity and liquidity.

Looking back at the past year, the market changed very rapidly. Can you explain the high-yield liquidity situation in Asia from the outbreak of the epidemic until the current economic recovery period?

Deng Haili:

1. In the early days of the outbreak of the epidemic in China (February to early March 2020), the market underestimated the potential impact of the coronavirus. Bond trading was still active, but many Asian investors who had experienced the SARS pandemic began to shrink their positions.

2. At the beginning of the global outbreak of the pandemic (mid-March to the end of March 2020), global liquidity contracted, and liquidity in the US stock, US debt, and bond repurchase markets dried up sharply. Due to the global sell-off of risky assets, basically all benchmark Asian dollar bonds experienced 10% to 50% off transactions, and the concentration occurred within two weeks. The characteristics of the period are: 1. Bonds with better liquidity fall more (because investors need to obtain liquidity as soon as possible). 2. Long-term bonds are adjusted due to scarce purchases, and shorter-term bonds are less adjusted because there are slightly more purchases. 3. The yield curve is inverted. Most transactions only focus on cash prices rather than yield (shifting to trading methods for distressed bonds or defaulted bonds) 4. Bloomberg's valuation seriously lags behind actual transaction prices, and the market is mainly a single buyer's market. 5. Despite the rapid decline in prices, the trading volume is still very impressive, and it is mainly based on large transactions between a small number of large players. Beginning in April, a large amount of underfunded funds entered the market. Over the next two months, prices quickly recovered and returned to pre-pandemic levels, surpassing the high at the beginning of the year under the Federal Reserve's quantitative easing policy.

3. Evergrande debt-to-equity risk incident in early October 2020. The second credit incident that stirred up market sentiment back then, but the rapid implementation of the risk incident boosted investor confidence at the time.

4. Since the fourth quarter of 2020, domestic creditor risk incidents have occurred, and the domestic and foreign secondary market prices of some bonds have fluctuated greatly, causing investors to be more cautious about high-yield issuers with high beta values. Liquidity in the secondary market for these names has also shrunk sharply. Benchmarks with good fundamentals are not affected; on the contrary, they are more sought after by investors. Combined with abundant capital liquidity, the yield curve for high-rated benchmark high-yield bonds flattened, and the yield curve for high-beta-worthy high-yield bonds steeper.

5. Asia's high-yield rating situation and investment deployment strategies before and after the pandemic

In terms of rating performance, can you summarize S&P's key high-yield rating actions in Asia before and after the pandemic?

Zhang Jihao: From the perspective of rating action, Asia's high-yield performance under the pandemic is better than the overall market

Zhang Jihao:Under the pandemic, we have seen an interesting phenomenon. Asia's high-yield performance is better than the Asian market as a whole. In 2020, under the impact of the pandemic, half of our rating actions in Asia were negative actions, such as downgrades, negative expectations, or negative observations, but only 29% of high-yield actions were negative actions.

This year, nearly a quarter of our rating actions in Asia as a whole were negative, less than half of last year, and similarly, only 19% of high-yield negative actions were lower than in Asia overall.

The main reason for this is that the high-yield market in Asia is about 45%, and almost half are Chinese real estate agents, and Chinese real estate is rebounding and recovering the fastest under the pandemic, so fast that it is not shrinking but overheating. The government has regulatory policies, but their purpose is to reduce risk and be beneficial to the stability of the market.

Markets are intertwined. Under such circumstances, what kind of investment strategies can be adopted to maintain good long-term investment performance?

Hou Mingwei: Judge market sentiment well and use “Kong Ming in advance” as a risk budget; combine dumbbell strategies with offense and defense to enhance the flexibility and resilience of the combination.

Hou Mingwei:As I just mentioned, March of last year was at a rock bottom. It is very important to make a risk budget if you want to invest or be “smart in advance.” It's also the “five-step investment process” I've been using since Prudential's (PGIM). The first step is risk budgeting to determine what stage of the macro cycle we are in. The best time of the cycle was in the fourth quarter of 2017, after which a bear market in the credit cycle began and ended with the 2020 global pandemic. With the world's unprecedented loose monetary policy and fiscal policies, and flooding in, we have now entered the beginning of a bull market cycle.

In terms of overall layout, I used a dumbbell strategy, taking into account the toughness and flexibility of the combination. About 50% lays out high-quality, high-yield bonds, which are not greedy; instead, they use excellent interest rates of 6-7%; the other half focuses on deploying Alpha opportunities to seek capital gains and further increase portfolio returns.

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