Asian Hunger for Yield Tested by Junk-Rated Casino Bond Planby and
Average junk yield reaches record-low in Bank of America index
‘This is a real gamble due to its short track record:’ Chia
Investors are so hungry for yields in Asia’s junk bond market that even some of the riskiest firms are coming to market.
Imperial Pacific International Holdings Ltd. plans to sell dollar bonds for the first time to fund its casino resort in Saipan Island, a U.S. territory in the Pacific Ocean, according to a bond document. The Hong Kong-listed company, whose receivables tripled in the first half on unpaid bills of VIP gamblers, had enough cash to cover just 18 percent of its short-term debt as of June 30, the document shows. The bond is rated B1, four steps below investment grade by Moody’s Investors Service.
“This is a real gamble due to its short track record and execution risk,” said Raymond Chia, head of credit research for Asia ex-Japan at Schroder Investment Management Ltd. in Singapore. “The valuation on Asia junk bonds is becoming very stretched so the margin of error is very thin.”
Yields on Asian junk-rated dollar notes have declined 288 basis points this year to a record low 6.34 percent on Sept. 23, according to a Bank of America Merrill Lynch index with data going back to 1996. Asian companies excluding Japan have sold $13.8 billion of non-investment grade securities in dollars, euros and yen this year, up 41 percent from a year earlier, Bloomberg-compiled data show.
A call to Imperial Pacific’s general line went unanswered. Shen Yan, president of global capital market at Imperial Pacific, declined to comment. An e-mail to Leo Chan, chief financial officer at the company, went unanswered.
It’s early days for the company, which has been operating a temporary resort since November. Cui Lijie, Imperial Pacific’s current major shareholder, bought a Chinese food processing company in September 2013, changed its name and announced the Saipan casino license in August 2014. Its plans include a 16-story hotel with 329 rooms and a 221 gaming table casino, according to the document.
Casinos have been opening around the Asia-Pacific region in the past two decades targeting Chinese tourists. Genting Singapore Plc, which operates Resorts World Sentosa in the city, is set to open a resort in Jeju, South Korea, late next year, according to its earnings report. Hong Kong-listed NagaCorp Ltd., a casino operator in Phnom Penh, Cambodia, completed a share placement earlier this month to raise HK$950 million ($122 million) and its stock is up 207 percent in five years.
Winners and Losers
While the red-hot market has allowed weaker companies to sell bonds, their performance has been mixed. Notes issued by Hua Han Health Industry Holdings Ltd. slumped 7.3 percent since their June debut. Fitch Ratings cut its debt in August to four steps below investment grade. Chinese developer Oceanwide Holdings International Ltd. rated five levels below investment grade by S&P Global Ratings has returned 6.2 percent since a fundraising in May.
Trade receivables more than tripled to HK$3.7 billion in the first half, equivalent to almost 91 percent of its revenue in the period, the bond document shows. Lucror Analytics said the sponsors of the project may lack the "robustness" to offer support should problems emerge.
“The proposed issuance highlights challenges faced by investors when markets start to overheat,” said Charles Macgregor, head of Asian high-yield research at Lucror in Singapore. “The urge to increase yield by adding risk needs to be tempered by a more rational assessment.