* Bond liquidity rises as euro drops against other currencies * Strong demand for high-yield even as safe-haven bonds tighten * Jababeka at 12% shows European liquidity fuelling risk appetite By Christopher Langner and Neha D'Silva SINGAPORE, July 20 (IFR) - A successful high-yield bond for an Indonesian company with a history of defaults is being seen as an early sign that a carry trade out of Europe is extending beyond Asia's currency markets and into credit. The five-year offering last Thursday for B+/B rated Kawasan Industri Jababeka, priced to yield a heady 12%, is the first from a sub-investment grade Asian issuer since May 9. (See Indonesia Debt capital markets.) Jababeka's high-risk transaction comes at a time when yields on US Treasuries are near a record low, and Swiss, Danish, German and even Austrian short-term government bonds are offering negative yields. Instead of signalling extreme risk aversion, the negative yields in Europe appear to be a result of abundant liquidity conditions. That, in turn, has pushed down yields on high-rated bonds, prompting investors to move down the credit spectrum in search of better returns. Last week's deal for industrial estate developer Jababeka shows that those dynamics are also opening a window for riskier transactions, hinting that many more sub-investment grade deals may be on the way. ECB CUT THE TRIGGER Analysts have pointed to the July 5 rate cut by the European Central Bank - following a string of similar moves by other central banks - as the trigger that unleashed this wave of liquidity. Currency traders first noticed a carry trade emerging out of Europe as the higher-yielding Australian and New Zealand dollars surged against the euro. Other bankers have indicated that central banks and sovereign wealth funds are shuffling their holdings as a result of these rate cuts, investing either in ultra-safe bonds - such as Bunds and Treasuries - or in high-grade that gives them a pick-up over that. That fact that was made evident in the past two weeks as new issues rated Single A or higher from Japan, Korea and Singapore saw heavy buying by central banks and public sector investment vehicles. Bonds from supranationals issued in the past two weeks have also logged record-low yields. That move has created a domino effect that is pushing the traditional buyers of Asian bonds into ever riskier credits - as the recent rally in Asian high-yield underlines. The JP Morgan non-investment grade Asian Credit Index, known as the JACI high-yield, has recovered to 622bp on July 19 from its peak of 727bp on June 4. Part of that move can be linked back to the European carry trade: in the same period the Australian dollar has surged from 1.284 against the euro to a record of 1.18 on July 20. CHEQUERED PAST Jababeka's issue is proof that this yield squeeze is pushing Asian investors towards high-risk bets. "This is very risky debt, the kind of stuff that you might sell to vulture funds," said a hedge fund manager who swears to have stayed out of the deal. The strong words reflect the company's spotty history. In September 2001, Jababeka signed a US$325m debt restructuring with creditors, including the Indonesian Bank Restructuring Agency, which held half of the debt and which it sold in February 2002. Creditors took an 80% haircut in this restructuring. Jababeka then defaulted again in June 2002 in bizarre circumstances. Its failure to make repayments to banks, apparently after mistakenly depositing the money into the wrong bank account, allowed the company to declare itself bankrupt. Eventually Panin Bank and 18 investors forced a plan on Jababeka's other (and original) lenders but which greatly alleviated the company's debt burden. At the time, bankers said the deal equated to a haircut of about 74%. That kind of track record suggests that Jababeka should only be able to sell bonds - even at 12% -- in a bull market, when yield-hungry investors choose to turn a blind eye to inherent risks. Usually, however, such a market would be clearly signalled by a spike in Treasury yields and Bunds as investors switch out to stock up on riskier assets. This time, however, liquidity conditions are creating a different kind of bull market. Such a scenario suggests that Jababeka may be just the first ripple in a wave of high-yield deals to come from Asia. Indeed, China Fishery Group (Ba3/BB-) and Sri Lanka's People's Leasing (B+/B+) are poised to launch new issues this week. And investors are already saying that both deals are being heavily sought after. (Reporting By Christopher Langner and Neha D'Silva; Additional reporting by Jonathan Rogers; Editing by Steve Garton.)

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