Asian investors flee junk bonds for safety of government debt

FUNDRAISING in Asia’s junk bond market has ground to a halt as investors flee and turn to the safety of government debt.

FUNDRAISING in Asia’s junk bond market has ground to a halt as investors flee and turn to the safety of government debt and more secure companies.

Mounting concerns over the health of the world economy, and especially China’s, is driving the shift, while fears of more defaults are growing after a Chinese developer failed to pay the interest on time for its offshore debt last week.

Two weeks into the new year, just one bond worth $US200 million rated below investment grade has been sold in Asia, excluding Japan, compared with $2.9 billion and $3.8 billion in the same period in 2014 and 2013 respectively, according to Dealogic. That’s the smallest amount since 2012.

The winners have been issuers deemed safer choices: the governments of Indonesia and the Philippines, and large corporates with high credit ratings like China Shenhua Energy Co. , which have issued a combined $18 billion to huge appetite from investors.

“It is probably not a year to adventure into the high-yield space,” said Desmond Soon, Asia co-head of the Western Asset Management, which manages $471.6 billion in assets. Though he says he has always preferred investment-grade securities, the current circumstances give even more impetus to stick with borrowers with top credit ratings and strong government support.

The flight to quality will only add to the borrowing cost of struggling emerging-market companies, as investors are lured back to a growing U.S. economy.

The Philippines’ Rizal Commercial Banking Corp., just shy of an investment-grade rating, was the only junk bond issuer in the region so far this year, and raised $200 million at a cost of 4.5 per cent earlier this week.

“Any [high-yield bond] issuer wanting to borrow now has to pay higher yields than they would have a few months ago,” said Herman van den Wall Bake, Asia head of fixed income capital markets at Deutsche Bank AG.

Dow Jones Newswires