Scott Murdoch, Alun John

HONG KONG, (Reuters) – Asia’s high yield bond managers have been cautious about buying into secondary market companies because of the turmoil in China’s property sector.

Since the beginning of May, there has been turmoil in the region’s junk-rated high-yield bond market. China Evergrande Group is struggling to survive. Investors try to determine which cash-strapped Chinese developers may not be able to pay their scheduled payments.

Companies are finding it more difficult to issue debt due to falling prices and declining returns. Morningstar has measured that 43 high-yield fund returns are now down by 15.8% in 2021, while they were up 1.14% last year.

A Hong Kong-based banker in debt capital markets declined to identify himself as he wasn’t allowed to talk to the media. He said that high yield had not performed well and that everyone was more careful.

He stated that fund managers usually start to rule out their books around Thanksgiving, but it is happening this year.

Only one high yield deal in Asia has occurred so far, in November when Medco Laurel Tree Pte, an Indonesian oil-and gas servicing company, raised $394million. Dealogic reports that high-yield transactions amounted to $5.7 billion between September and October.

The data revealed that $3.9 billion of high yield debt is expected to mature by the end of this year.

“It is common for issuance activity to drop in response to market volatility – investor demand is poor and borrowing costs are high, so issuers who are not forced to issue prefer to wait for conditions to improve,” said Paul Lukaszewski, head of corporate debt Asia Pacific, at fund manager abrdn.

VNET Group Inc., China’s data center operator, has pulled off a $300 Million U.S. dollar bond deal last week due to low demand.

Ek Pon Tay is the emerging market debt portfolio manager at BNP asset Management. Despite recent price increases, yields of Chinese real estate developers’ bonds have remained high enough that refinancing would not be feasible for many high-yield developers.

Tay explained that the China real-estate developer industry is priced in credit stress. “I recently added issues with a lower refinancing risk.”

The record-breaking 28.54% average yield for dollar debt issued by Chinese corporations of high-speculative quality hit Tuesday. The yields fell more than 330 basis point last week, as some investors mistakenly believed that headlines from China’s state media suggested an increase in financial restrictions. However, the average yield remained high at 25.24%.

Carol Lye is Brandywine Global’s associate portfolio manager. “This volatile wild market phenomenon is rarely seen, and opens up opportunities for being positioned in quality name,” she said.

However, caution should be taken as volatility is likely to continue because many property companies remain in tight liquidity.