Leveraged Asian Investors May Spur Bond Price Slump: Barclays

Wealthy Asian investors who’ve borrowed against their houses to buy bonds may find themselves among forced sellers if interest rates rise, spurring a price slump in vulnerable securities, according to Barclays Plc.

U.S. dollar-denominated notes sold by more than 20 companies including Olam International Ltd. and Henderson Land Development Co. are some of those most exposed if private bank clients move money out of the fixed-income market, Barclays said in a research note dated March 14. Private banks hold 15 percent to 20 percent of total corporate bonds in Asia and as much as 30 percent of high-yield, or junk, notes.

Low borrowing costs have been one of the main factors driving the strong demand for Asia credit and many high net worth investors went further into debt to buy the securities, according to the report. In the past six months, equities have generated solid returns while credit has lagged, creating a risk fund flows will rotate out of bonds in a quest for higher returns and compound the price slump.

“U.S. rates are already beginning to rise, albeit gradually, and leveraged lending could be scaled back if risk committees begin to focus on the quality of such lending,” according to analysts led by Krishna Hegde, Barclays’ Singapore-based head of Asia credit research. Furthermore, any sharp or sustained sell-off in Treasuries would impact bond prices and raise borrowing costs. Considering most private bank investors don’t hedge rates, “this is an important risk factor,” they wrote.

Margin Calls

Ten-year Treasury yields have risen 20 basis points this year to 1.95 percent as of March 19. Asian stocks have returned 4.04 percent since Dec. 31 versus 0.83 percent for dollar bonds in the region, Bank of America Merrill Lynch indexes show.

“Based on our discussions with various private banks, we think some private accounts could face margin calls if U.S. Treasuries sold off by 1.5 percent to 2 percent,” Hegde wrote. In such an event, credit committees may turn conservative and scale back on loan-to-value ratios, which could result in margin calls for highly leveraged portfolios, according to the report.

Bonnie Ngan, a Hong Kong-based spokeswoman at Henderson Land, declined to comment on the report when contacted by e-mail today. Hung Hoeng Chow, a Singapore-based spokeswoman at Olam, also declined to comment.

Weak Structures

Other bonds flagged in the report as being potentially vulnerable include Cosco Pacific Ltd.’s $300 million of 4.375 percent notes due January 2023, the $350 million of 6.375 percent September 2017 bonds sold by Sun Hung Kai & Co. and Soho China Ltd.’s securities in the U.S. currency.

“A potential slowdown could affect segments such as Reg S only issues from Hong Kong companies that are unrated or BBB-,” the analysts wrote.

High-yield bonds currently priced below issuance levels with a concentrated buyer base and corporate hybrids that have weak structures could also be hurt, he said.

Bonds sold under Regulation S may not be offered or sold to investors in the U.S.