With the 1997 Asian financial crisis a receding memory, lower-rated companies in the region are successfully issuing growing amounts of longer-term bonds. Standard & Poor’s says in a report, released last month, that a rising proportion of lower-rated issuers, however, could spell danger for investors down the road.
The report says that in Asia excluding Japan, the proportion of high-yield issues to total corporate bond issues rose to 47% in 2005 from 28% in 2002. A rising proportion of lower-rated issuers is usually an early warning of increasing default pressure, it says.
The Asian high-yield market should have another strong year in 2006, however, as defaults stay low and economic conditions remain relatively strong, S&P says. But market volatility is expected to emerge gradually in the medium term, it says, and these high-yield bonds are more susceptible to financial distress.
With likely increased issuance by companies based in China, market participants say there is uncertainty about whether the country’s bankruptcy laws provide adequate protection for investors.
The major medium-term risks to the outlook for the Asian high-yield corporate bond market are a significant slowdown in US consumption, higher oil prices and rising interest rates.