China’s leasing companies have actively issued USD bonds in the past several years, driven by their rapid expansion in the overseas aviation and ship leasing business. In the first eight months of this year, they have issued an aggregate of USD8bn bonds, which represents 70% of last year’s issuance. As capital needs remain high due to decreased operating cash flows this year, we expect another USD3-4bn bonds to be issued in Sep-Dec 2020e, leading to a full-year gross issuance of USD11-12bn in 2020e. Global leasing companies have been under pressure due to COVID-19, but China bank-affiliated leasing companies are in relatively better situation. The net lease yield compression has been eased by generally lower funding costs. We believe the asset quality of their financial leasing assets will only deteriorate moderately, as their financial leasing business is mainly in China’s onshore market. Their already high provision coverage ratios should help provide more buffer against any increase in non-performing assets as well. Risks associated with their operating leasing business are mainly from aircraft leasing, reflected in higher impairment costs. However, the impairment cost should stay manageable, given their young fleet portfolios, high-quality customer base, and relatively small percentage of offshore aircraft assets. In addition, their parent banks have provided strong funding support. We believe the overall credit risk of the Chinese leasing companies has been contained by strong parent support. Given the overall underperformance of leasing bonds this year, the leasing segment’s bond pricing has remained attractive in general. We open buy trading call on BOCOMFL’s BCMLHK’24 bond. 

From a Credit Strategy perspective, we re-emphasise last month’s view that the Asian credit markets are looking a bit tired after the powerful spread compression movement triggered by the Federal Reserve’s shift to a super accommodative monetary stance from March onwards. We expect an upswing in market volatility in the months ahead for both IG and HY credits. We maintain our iBoxx ADBI and AHBI-Corp credit spread forecast of 240bp and 840bp, respectively, for end-2020e, compared with 205bp and 764bp as of end-August.  

In Credit Review, we point out that the rates sell-off during the month drove Treasury yields higher, especially at the long-end, which also brought sellers into the investment-grade space, reinforcing the market’s appetite for bonds in the front end of the curve. With that, high-yield credits gained better traction in August, outperforming investment-grade peers in terms of both spread movement and total returns1. Despite some signs of spread widening during the month, the average spread of Markit iBoxx AHBI-Corp managed to tighten 58bp to 764bp by the end of August, while the average spread of the Asian USD bond index, iBoxx ADBI, moved in 13bp to 205bp over the same period. As for total returns, in August, ADBI and AHBI-Corp reported gains of 0.17% and 1.91%, respectively. Meanwhile, deal flow in the primary market remained relatively steady but has fallen to the lowest since March 2020. Issuers from Asia raised USD21bn through dollar bonds in August, down 35% m-o-m. Including EUR-denominated bonds, total new bonds amounted to USD21.6bn in the past month.   

In China’s HY industrial space, we are concerned about the complacent pricing of bonds where near-term liquidity remains a question mark. The current stress in liquidity might lead to a distressed exchange scenario should banking support weaken. This could be the result of a more cautious attitude from banks, a further deterioration of company or sector fundamentals, or simply a lack of proactive financing exercises in the days leading to bond maturities. We should be prepared for a swift repositioning if things turn sour, as the risks are heavily skewed to the downside. 

Korea is highlighted in the sovereign section. The government is likely to keep its expansionary fiscal policy and plans to run an average 5.7% of GDP deficit in 2021-24. Bond supply pressure should intensify with the proposed KTBs issuance plan, leading to a wide gap between demand and supply. The pressure from the expansionary fiscal policy could push the BoK towards an outright bond purchase program. If a QE program is introduced, the possibility of a rate cut would increase as the policy rate will have to reach the lower bound. We believe the proposed expansionary fiscal stance poses no risk to the sovereign credit metrics.