Over the last six months the Asian HY market has experienced a level of volatility not experienced since 2012. A large factor in this volatility has been uncertainty over the Chinese property sector.
Issues around regulatory challenges emerged last October with the detention of Agile's Chairman, quickly followed by a similar issue at Kaisa. A real problem emerged when Shenzhen authorities started to lock property units. Kaisa was initially affected, however Logan Properties and Fantasia were also found to have locked units, albeit to a lesser degree. These developments, against a backdrop of falling property prices, precipitated a sell-off in Chinese property bonds in January 2015.
The market has stabilised somewhat over the last four months. That said, we note option adjusted spreads (OAS) on higher rated bonds are now well within the levels of early December, while the lower rated bonds still remain slightly above. Seemingly, investors have reallocated funds to the sector but have chosen less risky credits in the process. Potentially, we see a better pricing of risk emerge. We believe, however, there is now limited prospect of further material spread contraction and recommend investors start reducing exposure to the higher beta credits in the sector.
Charles Macgregor is the Head of Asia of Lucror Analytics, an independent credit research specialist focusing on the high yield markets.