Hong Kong-based BEA Union Investment is about to launch a China high-yield bond fund, though it is avoiding buying renminbi issues for the time being in light of uncertainty over the currency. This will further reduce the universe of assets available to it, especially given the recent heavy decline in dollar-denominated China HY bond issuance.
China HY dollar issuance halved last year to $8.4 billion from $16.5 billion in 2014 and continued to fall this year, according to Dealogic. It stood at just $1.1 billion as of April 12, compared to $4.5 billion for the same period last year, $6 billion in 2014 and $10.5 billion in 2013.
However, Pheona Tsang, head of fixed income at BEA Union, said her firm's trading team would be able to access those bonds that were available. As of April 12, the total outstanding value of China high-yield dollar bonds was $50.2 billion across 150 issues.
Moreover, there are several good reasons to invest in this asset class right now, not least the attractive yields it offers, noted Tsang. As of early February, Chinese high-yield bonds (both dollar and renminbi) offered an average yield of 9.1% in dollar terms, well above that for Asian issuers overall (4.04%) and five-year US Treasuries (1.26%), she said, citing Bloomberg data.
Moreover, the fund launch comes as interest has rebounded in high yield amid receding expectations of rate hikes by the US Federal Reserve, added Tsang.
JP Morgan data shows an €3.2 billion ($3.65 billion) flow into European high-yield funds in March, the largest monthly inflow on record, and another €391 million inflow in the week ended April 6. Likewise, US HY funds took in $1.2 billion in the week ended April 6, representing the seventh weekly net inflow over the past eight weeks, for a total $14 billion of inflows in the period.
BEA Union expects to raise $20 million during the fund’s initial offering period from April 5 to 22. It will focus on buying bonds with yields of between 6-10%, and credit ratings of B or BB. “Such issuers are generally in good financial condition and their bonds provide stable income,” Tsang said.
The strategy will invest in about 50 bonds and can put up to 20% of its allocation in renminbi-denominated issues. The core holding (about 58%) of the fund will be in real estate company debt, the biggest component of China high-yield issuance. Tsang said the sector would benefit from China’s monetary easing and accommodative property policies, such as relaxation of house purchase restrictions and lower down-payment ratios.
This is despite widespread concerns that mainland property is a bubble set for a crash, at least partly because of the easy-money policies that Tsang refers to.
She also pointed to opportunities in other sectors, such as retail and basic industries. Such HY issues offered yields of 5-7% in 2015, but that figure has risen sharply this year thanks to concerns about China’s economic slowdown and overcapacity. Yields of some basic industry HY bonds have hit 20%, noted Tsang.
The potential for defaults is a key issue to consider, she said, but the credit risk for Chinese high-yield dollar issuers is low, as most of them are big companies.
The fund is expected to invest 68% in mainland bonds and 14% in Hong Kong issues. It is also allowed to buy names from other countries, to diversify concentration risk. The plan is to allocate 10% to Indonesia and 5% to India, for example.