Bite Cautions Funds as All 2013 Dollar Sales Drop

Bonds without credit ratings or maturities led the slump in all of this year’s new dollar-denominated issues from Chinese companies as investors balked at riskier debt and favored rallying equities.

All of the $12.9 billion sold by Chinese and Hong Kong companies in 2013 lost money as of Feb. 5, according to prices compiled by Bloomberg. Undated notes sold from Cheung Kong Holdings Ltd., controlled by Asia’s richest man Li Ka-shing, performed the worst. Chinese bonds lost 1.4 percent this year, after gaining 24.6 percent last year, while Asian notes declined 1.1 percent, according to JPMorgan Chase & Co.’s Asia Credit Index. Global equities gained 5 percent.

Chinese and Hong Kong borrowers sold almost seven times more undated or unrated debt in January than a month earlier after the cost of debt globally fell to an all-time low of 2.54 percent at the end of last year, according to Bank of America Merrill Lynch indexes. Agile Property Holdings Ltd. agreed to pay 165 basis points less to sell bonds without a fixed maturity on Jan. 11 than for five-year debt 10 months earlier.

“Having seen all these losses, the market should be more rational,” said Brayan Lai, an analyst in emerging-market credit trading at Jefferies Group Inc. in Singapore. “As long as investors remember the bite from January, things will be structured better and pricing will be better as well.”

Economic Expansion

Almost 88 percent of the dollar bonds sold this year by companies from Asia outside Japan lost money, according to data compiled by Bloomberg. That compares with 54 percent of new European deals and 40 percent of those in the U.S.

Average yields on Chinese securities in dollars have risen 41 basis points this year to 5.51 percent, JPMorgan gauges show. The average yield premium over Treasuries widened 23 basis points this year to 399 basis points as of Feb. 5. Asian high-yield spreads rose 16 basis points an average of 381.

The MSCI World Index of equities in 24 markets had the best January in two decades after the U.S. economy expanded 2.2 percent in 2012, compared with the 2.1 percent that was forecast at the start of the year in a Bloomberg survey.

China’s economy is expected to grow 8.1 percent in 2013, accelerating from 7.8 percent last year, according to the median estimate of 47 analysts surveyed by Bloomberg News. The country will stick to property controls and maintain “healthy development” of the real-estate market, Xinhua reported Li Keqiang, who’s set to become the next premier, as saying.

2012 Gains

“It is supply indigestion among the key drivers, but it’s a technical move rather than a fundamental one and if you look at the data either economy-wise or corporate-wise, it is improving,” said Steve Wang, Hong Kong-based head of fixed-income research at BOCI Securities Ltd., a unit of China’s fourth-largest bank. “I don’t think this will be a turning point for the market. There is no need to panic.”

Asian high-yield notes outperformed investment-grade debt last year, gaining 20.4 percent versus the 11.3 percent return on higher-rated bonds, according to JPMorgan indexes. Wang said that while high-yield bonds still present the best opportunities some perpetuals hadn’t offered enough benefits to investors.

“If you’re an investor who’s not happy with fixed-income rates being so low and at the same time are not ready to get into equity because things are so uncertain, I’d rather be in high-quality, high-yield debt for the income generated than in a perpetual,” said Sabita Prakash, head of Asian fixed income at FIL Ltd., which is known as Fidelity Worldwide Investment and manages more than $240.4 billion as of the end of last year. Perpetuals are “a little bit of a no-man’s land,” she said.

Falling Prices

Hong Kong and Chinese companies have dominated dollar sales this year, issuing 55 percent of the $23.4 billion offered in the region, data compiled by Bloomberg show.

Cheung Kong’s securities, which pay the same 5.375 percent for the life of the bond despite having no fixed maturity, slid to 90.2 cents on the dollar from par as of Feb. 5.

Perpetual bonds from Agile were the second-worst performers, while unrated debt from CSI Properties Ltd. was trading at 92.9 cents on the dollar from par as of Feb. 5.

“We believe that most of the subscribers or investors of our bond at issue are long-term investors, and the quoted current market price may be affected by the lack of trading liquidity of our bonds and thus are not a fair representation of their value,” Simon Kan, Hong Kong-based company secretary at CSI Properties, wrote in an e-mailed reply to questions.

Agile declined to comment on its bond trading, according to iPR Ogilvy, Agile’s public relations consultant. A spokesman for Cheung Kong was not immediately available to comment when contacted by phone and e-mail yesterday.

‘Sharp Sell-Off’

“The spate of unrated issuance that we’ve seen in senior unsecured format is just as susceptible to a sharp sell-off as any of these hybrid structures,” said Ronan McCullough, a managing director in the global capital markets team at Morgan Stanley in Hong Kong.

Perpetual bonds, which are often treated as part-equity by rating companies, allow companies to borrow more without proportionally increasing leverage or diluting shares. Citic Pacific Ltd., the steelmaker and property developer, became the first issuer of undated notes in China outside of Hong Kong with a sale of $750 million of 7.875 percent notes in April 2011.

The structures are becoming increasingly bespoke, making it hard to pinpoint how particular terms of the securities should affect price, according to Ankur Prakash, a director in the debt capital markets team at Standard Chartered Plc, speaking at a Bloomberg News roundtable in Hong Kong last week.

Agile, Petron

Agile, which sold its notes days after its chairman and founder was formally charged with two counts of indecent assault in Hong Kong, can opt to buy back the notes after 5 1/2 years, according to data compiled by Bloomberg. If it doesn’t, the coupon is reset at the initial spread more than prevailing five-year Treasuries and then reset again and increased by 25 basis points after 10.5 years with a further reset and an additional 75 basis-point rise after 20.5 years, the data show.

That compares with notes sold by Petron Corp., the largest refiner in the Philippines, which can also be called after 5 1/2 years and on which the coupon resets over prevailing five-year Treasuries while increasing by 250 basis points at 5 1/2 years, data compiled by Bloomberg show.

Lower Fair Value

Agile’s perpetual notes fell to 91.4 cents on the dollar as of Feb. 5, when Petron’s bonds were quoted at 100.01 cents.

The cost of insuring China’s debt against non-payment with credit-default swaps has increased one basis point this year to 67.4 basis points as of yesterday, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. The yuan fell 0.04 percent to 6.2343 per dollar in Shanghai.

China’s benchmark 10-year government bond yielded 3.59 percent as of yesterday, climbing from as low as 3.24 percent on July 11. Top-rated corporate debt with similar maturities paid 5.24 percent, according to Chinabond indexes.

The average yield on global corporate debt rose to 2.74 percent as of Feb. 5, from an all-time low of 2.54 percent on Dec. 28, according to Bank of America Merrill Lynch indexes.

“The market is still very picky,” according to Samson Lee, head of debt capital markets at BOCI Asia Ltd, a unit of Bank of China Ltd. “If you look at the secondary performance, some of the perpetuals are not doing that well, which means people recognize or expect a lower fair value.”

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