A surge in junk-rated bonds has made Chinese borrowers more aggressive, with select ones succeeding in cutting their costs for repaying bonds early, a change from standard practice that worries some investors and bankers.
After a tumultuous 2018 in which many borrowers were shut out from the market and yields spiked dramatically over fears of steadily rising U.S. interest rates, the market floodgates have reopened this year.
So far $40.1 billion has been raised in high-yield, or junk bonds, out of Asia, almost as much as the $45.6 billion sold in 2018, Refinitiv data showed, as a now-dovish stance from the U.S. Federal Reserve and a stock market rally have stoked investors' risk appetite. China has accounted for $10.6 billion of this year's issuance.
But efforts by some Chinese borrowers to lower the price they have to pay to call, or redeem, a bond early has some investors and bankers fretting it could set a negative precedent.
Investors do not like bonds to be redeemed early as they expect a steady return from the coupon until maturity.
Market conventions have been for the call price to be equal to the par value of the bond plus half of the coupon on the first call date, decreasing by half afterwards.
If a bond carries a coupon of 6 percent, for example, the issuer would be expected to pay 103 percent of the par value of the bond to redeem it early. Bonds are usually sold at par, or 100 cents on the dollar.
"We would expect at least half the coupon being used as a way to compensate the bondholder for being called," said Stephen Chang, Hong Kong-based executive vice president and portfolio manager at Pimco.
"We like to negotiate better terms for that, but there is quite strong demand out there with the inflows happening and other investors might be keen to put money to work quickly via new deals."
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