China Bond Underwriters Add to Selling Pressure on Junk Debt

(Bloomberg) -- The anxiety sweeping through credit markets is becoming self-reinforcing, say underwriters.

The chain of events goes like this: in a weak market backdrop skittish Chinese junk bond issuers ask banks to guarantee bigger slices of debt sales to make sure the deal goes OK; the underwriters then try to get rid of those bonds in the secondary market immediately; prices drop. That, in turn, makes it harder for other deals to come to market.

"We’re seeing a tendency that some underwriters are taking more bonds than their balance sheet can hold given what they have committed to get into the deal," said Sebastian Ha, head of the debt syndicate at Bank of China in Hong Kong. This leaves them with little choice but to sell the bonds the next day and this practice is “somewhat distorting” the market, Ha said.

It’s another sign of the changing times for Asia’s dollar bond market, where rising global borrowing costs are clouding the outlook after years of bumper sales and ever-tightening spreads. Yields on junk notes from Chinese firms rose to the highest since April 2016 this week, according to ICE BofAML Indexes. At least 14 of 20 junk-rated bonds priced since April fell below pricing levels on the first day of trading, according to data compiled by Bloomberg.

Companies are increasingly asking bookrunners to underwrite a portion of their bond deals in order to price the issue, according to CLSA. "Investors are exercising more caution in participating in deals that are known to have orderbooks that are skewed towards bookrunner orders," said Andy Siow, head the of fixed income syndicate at the firm.

Underperformance of first time issuers not only affects the sector as spreads widen, but it also makes it harder to get new deals done as investors need more convincing, said Joanne Wong, head of debt capital markets at Bocom International Holdings Co. If new issues underperform in the first few trading sessions, investors are likely to move on to trade other bonds, she said

--With assistance from Lianting Tu and Allen Yan

To contact the reporters on this story: Carrie Hong in Hong Kong at chong61@bloomberg.net, Narae Kim in Hong Kong at nkim132@bloomberg.net.

To contact the editor responsible for this story: Neha D'silva at ndsilva1@bloomberg.net.

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