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Asian high-yield corporate credit market turning cautious

Hong Kong, January 20, 2012 — Moody’s Investors Service says Asian high-yield corporate bond issuance will remain highly uncertain over the next few months as credit markets stay choppy, given concerns over European sovereigns, and as issues with Chinese corporate governance keep investors cautious.


“Caution and uncertainty look to be the by-words for at least the early part of 2012, and while Asian corporates may make preparations for the reopening of the high yield bond markets, it will likely take a higher speculative-grade rated, existing issuer to break the deadlock and open the floodgates for smaller and first-time names to the market,” says Laura Acres, a Moody’s Vice President and Senior Credit Officer.


“And, of course, such a scenario can only come after fears about further deterioration in Europe and the US lessen, and after investors look once again to move out of cash/investment grade names and into high-yield, fixed-income corporate assets,” says Acres. “Moreover, given the downturn in the debt capital markets and a seeming pull-back on bank lines provided by certain European banks, corporate liquidity is now expected to start to display obvious signs of deterioration.”


Acres was speaking on the release of a Moody’s review of the Asian high-yield corporate bond market during 2011 and its outlook for 2012, and which she authored.


“In this more challenging environment, speculative-grade companies could face higher costs, and weaker ones could have limited access to credit if investors decide it is too risky to lend to low-rated companies,” says Acres.


At the same time, the report says that, despite such pressures, liquidity profiles for high-yield issuers in Asia remain historically strong.


For example, high-yield corporate liquidity, as measured by the Asian Liquidity Stress Index, remains strong with just some 9.3% of the high-yield portfolio showing inadequate liquidity at 31 December 2011. In addition, the index is below the 2011 high of 13% — recorded in January

— and is well below the 37% reading posted during Oct-Dec 2008, the height of the global financial crisis.


And in terms of credit trends for the high-yield sector, defaults are likely to increase during 2012, having come off no default scenario in 2011, while rating downgrades are expected to persist as demand slows and access to funds remains tight.


Looking back at 2011, the report says that a bumper level of corporate bond issuance was evident in H1, almost exceeding the total for all of 2010. But in H2, almost no new rated bonds were issued for issuers rated

Ba1 and below as conditions turned.


“Current credit conditions with an obvious lack of investor appetite for high-yield names have caused many issuers to return to the local and regional bank markets to access funds albeit with more stringent limitations frequently imposed by banks through maintenance covenants.

The question is how long this can continue, particularly if European banks seek to rationalize lending books and focus on markets closer to home,” says Acres.


The report is entitled Asia Pacific Corporates: 2011 High-Yield Performance Review and 2012 Outlook. It is available at www.moodys.com.

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