Asia Bond Risk Surges to 8-Month High as Pimco Wary on Junk DebtRachel Evans and Kristine Aquino
The cost to insure Asian corporate and sovereign bonds against default surged to an eight-month high as Pacific Investment Management Co. warns investors should be wary of high-yield debt in the region.
The Markit iTraxx Asia index of 40 investment-grade borrowers outside Japan jumped 15 basis points to 142 basis points as of 4:07 p.m. in Hong Kong, Royal Bank of Scotland Group Plc prices show. The gauge is poised for its highest close since Sept. 26, according to data provider CMA. Pimco favors higher-rated companies over speculative-grade issuers as slowing growth in Asia threatens profits, according to a report released today by the Newport Beach, California-based investor.
China’s economy will slow to average 6 percent to 7.5 percent annual expansion during the next five years from 9 percent the past five, weighing on the region’s growth, according to Pimco’s report. Average yields on Asian junk bonds in the U.S. currency climbed 7 basis points yesterday to 7.16 percent, the highest since October 2011, JPMorgan Chase & Co. indexes show. Borrowing costs for investment-grade issuers reached 4.11 percent, the most in a year.
“Markets are definitely jittery,” said Shankar Narayanaswamy, Singapore-based global head of credit strategy at Standard Chartered Plc. “It is unlikely that issuers will come until the present period of volatility subsides.”
No borrowers from Asia outside of Japan are currently marketing dollar-denominated bonds, with China Huaneng Group Corp. raising $400 million on June 4 in the most recent offering, data compiled by Bloomberg show.
Pacnet Ltd., the speculative-grade operator of undersea phone and Internet cables in Asia, plans to sell senior secured notes later this month, in part to buy back $300 million of existing notes due 2015, according to an e-mailed report from Moody’s Investors Service.
Companies in Asia outside Japan have almost tripled junk bond sales to $19.2 billion this year, data compiled by Bloomberg show. Moody’s has assigned Pacnet’s planned notes a provisional B2 rating, five levels below investment grade, according to its e-mailed report.
Pacnet will offer cash to holders of its existing 2015 notes to buy back the securities, according to a person familiar with the matter. The company is also seeking to amend the debt’s terms to remove restrictive covenants and certain terms governing events of default, the person said, asking not to be identified because the details are private.
Pacnet plans to meet investors in Singapore, Hong Kong, London and the U.S. from tomorrow to discuss the new bond sale, which will be after June 21, subject to market conditions, the person said.
The Markit iTraxx Japan index increased 1.5 basis points to 94 as of 8:56 a.m. in Tokyo, according to Citigroup Inc. prices. The measure has ranged from 74 to 115 basis points this quarter, according to CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the private market.
The Markit iTraxx Australia index was little changed at 118 basis points as of 10:08 a.m. in Sydney, National Australia Bank Ltd. prices show. Markets in Australia were closed for a public holiday yesterday.
Credit-default swap indexes are benchmarks for insuring bonds against default and traders use them to speculate on credit quality. A drop signals improving perceptions of creditworthiness, while an increase suggests the opposite.
The swap contracts pay the buyer face value in exchange for the underlying securities if a borrower fails to meet its debt agreements.