Investors are displaying increasing caution towards the Indonesian high yield sector where a growing new issue pipeline is butting up against historically tight yields and the weak trading performance of recent deals.
The first casualty of this new attitude was Indonesia's largest private tanker operator, PT Soechi Lines, which postponed a debut 144a offering on Monday.
The $200 million transaction had built a reasonable $300 million order book by Asia's afternoon. But it was then struck by typhoon Merbok after the Hong Kong authorities raised the No 8 signal and the territory's financial markets' participants went home.
By this point, London was opening slightly softer so lead managers JP Morgan, Mandiri Sekuritias and Standard Chartered decided to postpone the deal rather than risk it unravelling.
But Soerchi was always going to be a bull market trade, not only because it has a single-B rating (B1 stable/B+ negative), but also because it comes from the oil and gas services sector. The latter has been under extreme pressure since oil prices dropped in 2014 at a time when companies already had elevated debt levels and re-financing requirements.
This led Singapore's Swiber Holdings to default on its Singapore-dollar denominated debt last August, followed by Ezra Holdings a few months later. Swiber is now under judicial management, while Ezra sought US bankruptcy protection in May.
Other hard-pressed sectors, which did not previously have market access, have been able to successfully tap the Asian bond markets so far this year. Coal miner Bukit Makmur effectively re-opened it for Indonesia's commodity producers in early February, followed by triple-C rated Indika Energy in early April.
However, both deals came to market at a time when momentum was extremely strong. More recently, the troubles at Noble Group and Reliance Communications have reminded investors of how quickly a liquidity crunch can push companies to the bottom of the ratings spectrum.
As a result, PT Soerchi Lines needed to go out with a "generous" indicative yield around the 8.375% area to entice investors in. At this level, it would have offered a fairly significant pick-up over other single-B rated Indonesian names.
For example B1/B rated Pan Brothers International has a five non-call three-year bond outstanding, which is yielding about 6.6%.
The textile producer's deal has also been the best performer of the year’s Indonesian high yield issues. At Tuesday’s close, it was up four-and-a-half points from its 99.49% issue price in late January.
It also seems clear that most Indonesian high yield issuers will need to shorten their preferred tenor from seven non-call four to five non-call three in order to clear the market.
Property developer Agung Pomodoro was the last to test this structure in late May and its deal has not performed particularly well. The Ba3/BB- group priced a $300 million seven non-call four-year deal at par on a coupon of 5.95% one week after Standard & Poor's upgraded Indonesia to investment grade status.
However, the fairly large deal size, long tenor and spread have all weighed on the market and it has since dropped half-a-point.
Similarly, while Indika Energy was able to raise funds that lifted its Caa1/CCC rating to B2/B- in early April, it has also underperformed. The $265 million 6.875% five non-call three deal was being quoted down half-a-point from its 99.688% issue price on Tuesday.
Chicken feed for Japfa
However, some deals are still working. Sole lead Credit Suisse was able to place $100 million for Japfa Comfeed on Monday, which came back to market with a tap of its $150 million five non-call three deal completed in late March.
The bank did not release statistics showing oversubscription ratios or number of accounts, but it did say Asian investors took 82% and European investors 18% with a further split between fund managers on 95% and private banks 5%.
Pricing was fixed at 100.25% to yield 5.438%. The BB- rated deal has traded consistently well since its launch in March when it attracted $600 million demand from 85 accounts.
The new deal creates a more liquid transaction for the animal feed company and on Tuesday, it was being bid up slightly at 100.375%/100.625%.
But a five-handle yield for a low double-B rated name is “extremely rich” as JP Morgan put it in a recent research report. The investment bank is not alone in flagging how blurred the lines have become between Asia’s investment grade and high yield credits, although it did say investors appeared to be differentiating between stronger and weaker high yield names.
It suggests they would be better advised to chase yield from lower rated Asian bank capital issuers. While the latter deals carry risks of their own and are also trading at rich levels compared to their European counterparts, they come from borrowers with intrinsically higher credit strength.
For example, Bank of East Asia’s recent additional tier-1 (AT1) deal has a Ba2/BB credit rating, one notch higher than Japfa Comfeed. On Tuesday, its 5.65% perpetual non-call 2022 deal was trading around the 5.7% level, just 30bp wider than Japfa Comfeed’s 5.42% for an additional two-year maturity extension.
JP Morgan concluded that it does not “see value in low double-B or single-B names trading at less than 100bp over bank AT1” paper.
HSBC’s fixed income analysts also worry that investors may lose their discipline in a bid to enhance returns.
In its most recent monthly bond market review, published on June 8, it said, “There’s a growing concern that market participants will increase the use of leverage and also move down the credit curve to bolster total return performance in the months ahead.”
