Asia Credit:10HY bonds that are down 3-5points...
The buying opportunity?We analyzed the performance of China property bonds yesterday. Today, we look at some of the non-property HY names under our coverage that are down almost 3 points or more from YTD highs. In general, we are in the camp that the ongoing correction is more positioning/technical driven than fundamental. At the same time, we recognize that markets are not completely out of the woods yet and volatility might persist. Hence, while we do see this risk off as a buying opportunity, we are very selective. Our team upgraded China Aoyuan 2022s, Evergrande 2025s and Mongolia 2023s in separate reports yesterday. We are not making any recommendation changes in this note, but do reiterate some of our existing Buy recommendations.
What’s underperforming?Figure 1 has the list of 10 bonds that are down 3-5 points this year. We broadly categorize them into two buckets below:- Longer dated paper: Majority of the underperformers have more than 5 year maturity, which is not surprising. In fact, the top three laggards are all 8-10 year bonds. Even on a spread basis though, they are 35-40bp wider on average. Given the rate risk still lingering upon us, we won’t rush into adding these names. Having said this, we do acknowledge that almost all of the longer dated bonds are from quality issuers, trading well below par, so investors that can take some mark-to-market pain might think otherwise.
- Headline driven credits: All the other corporates have been witnessing one or the other negative headline. Gajah Tunggal and Shandong Ruyi have the overhang from potential covenant breach and inter-company guarantees respectively. Ehi is undergoing a possible privatization. Greenko and Vedanta have been in the news for making acquisitions. Hence again, their underperformance is not completely surprising.
Which laggards do we like?One each in China, India and Indo. All of them appear relatively cheap within their jurisdictions and are pricing in the negative headlines in our view. Plus, we don’t foresee any rating downgrades in the near term.
- Gajah 2022s: One of the highest yielding bonds in the Indo HY complex at 9% and looks much better than some of the recent new issues trading at tighter levels. Even if the loan covenant is breached, we expect banks to provide the waiver. Key downside risks are continued weak earnings & aggressive capex.
- Ruyi 2022s: Our recent plant visit to the company in Shandong confirmed the robustness of its operations. Concerns surrounding inter-company guarantees and M&A are not new. Again, at close to 9%, we feel investors are getting paid. Key downside risks include requirement to pay third party debt guarantees, further large acquisitions, etc.
- Vedanta 2024s: Like Ruyi, Vedanta has also been impacted by M&A news. However, we either see the potential acquisitions as immaterial or in line with previously stated strategy. Further, our constructive view on commodities hasn’t changed. Key risks are lower commodity prices, organic expansion delays, etc.