Odyssey Earns 23% on Troubled Debt as GTL Revamps: India Credit

Odyssey Investment Management LLC is beating peers by buying distressed bonds in India as the slowest economic growth since 2009 forces companies from Suzlon Energy Ltd. (SUEL) and GTL Infrastructure Ltd. (GTLI) to revamp borrowings.

The hedge fund based in New York focuses on Indian convertible bonds and bought debt of GTL this month as the mobile-phone tower operator recast $319 million of equity-linked notes, Managing Partner Mikhail Filimonov said. The Odyssey Convertible Bond Opportunities Fund’s biggest holdings include software developer Geodesic Ltd. (GEOD), Prime Focus Ltd. (PRIF), a company that created some visual effects for the science-fiction movie ‘Avatar,’ and drugmaker Strides Arcolab Ltd. (STR)

“While the bonds are trading at distressed levels, the companies in many cases are not, and this is as true this year as it was in 2011,” Filimonov, 55, said in a telephone interview yesterday. “We had lots of winners from debt repayments, and today we see value and excess-return potential from our friendly creditor-activism approach in restructuring.”

Signs of an economic rebound in Asia and Europe’s commitment to plugging Greece’s budget deficit are boosting returns on riskier emerging-market bonds. India’s dollar denominated convertibles gained 13.3 percent in 2012 after losing 11.3 percent last year, according to data compiled by Barclays Plc. Junk notes in the U.S. returned 13 percent while Chinese notes within a distressed debt index rallied 40 percent, according to Bank of America Corp.

‘Potential Upside’

“Investors are looking at buying convertible bonds at a deep discount on the potential upside in the stock price, plus the regular coupon,” Hemant Dharnidharka, head of credit research at SJS Markets in Bangalore, said by telephone yesterday. “The restructured debt presents an opportunity if they have faith in the company’s repayment ability.”

Odyssey’s fund has gained 23.3 percent this year, beating its peer average by the widest margin since its inception in 2009, according to data compiled by Bloomberg. Filimonov said the money manager has an average holding-period of six to 18 months and it profited from a bet when Suzlon redeemed its July 2012 bonds in August.

Goldman Sachs Group Inc. raised Indian stocks to overweight yesterday, citing an economic recovery, continued pro-growth policy reforms and declining inflation. The benchmark BSE Sensitive Index (SENSEX), or Sensex, has surged 24 percent this year and closed yesterday at the highest level since April 2011.

Sovereign Bonds

Asia’s third-largest economy may have expanded 5.5 percent in the three months through September, Finance Minister Palaniappan Chidambaram said Nov. 24, matching the growth rate in the preceding quarter. Economists forecast a 5.3 percent increase in gross domestic product, according to the median estimate in a Bloomberg survey before data due today.

The yield on benchmark 10-year sovereign bonds has climbed 17 basis points from a 14-month low of 8.04 percent in June, data compiled by Bloomberg show, as the central bank refrained from cutting interest rates amid the highest inflation rate among emerging markets. The rupee rose 1.2 percent to 54.8250 per dollar yesterday, paring this year’s drop to 3.2 percent.

Bond defaults may increase this year as Indian companies are expected to either reorganize or miss payments on 67 percent of $1.65 billion worth of convertible bonds coming due by March 31, India Ratings & Research Pvt. said in a Nov. 8 report. Nineteen companies that reneged on about $1.3 billion of notes between March 31 and Oct. 15 this year have yet to redeem them, according to the local unit of Fitch Ratings.

GTL Infrastucture

Bondholders of Mumbai-based GTL approved plans to exchange 35 percent of the company’s $319 million of convertible debt due this month for shares at 10 rupees each, the company said Nov. 8. The remaining 65 percent can be swapped for new five-year debt, or into new stock within 60 days at 12.64 rupees.

“We like GTL post-restructuring because they have very good assets that we believe are potential takeover targets,” Filimonov said.

The company’s shares rose 0.6 percent to 7.9 rupees yesterday and reached as low as 6.10 rupee this year in August.

“If somebody is betting on the fact that GTL will be able to monetize the tower business, then probably it makes sense to buy their bonds,” Jagannadham Thunuguntla, chief strategist with New Delhi-based SMC Global Securities Ltd. said in a telephone interview yesterday. “In the case of some companies, it’s not a question of solvency, but one of cash flow issues.”

State Bank, Reliance

Some investors prefer to invest in larger companies. Bonds of government-owned State Bank of India (SBIN) and Reliance Industries Ltd. (RIL), the nation’s largest company by market value, make better investments than equity-linked debt of troubled issuers, said Rahul Sharma, a fund manager at London-based Finisterre Capital LLP, which oversees $1.6 billion in emerging-market assets, including $370 million dedicated to corporate credits. He doesn’t own Indian convertible bonds.

“If I can’t buy and sell my position reasonably quickly, I want none of it,” he said. “For hedge funds, liquidity- adjusted returns are becoming an overarching feature of their trading decisions.”

The cost of insuring State Bank of India’s debt, considered a proxy for the sovereign by some investors, for five years against non-payment using credit-default swaps fell to a 15- month low of 240 basis points on Nov. 7 and was at 244 yesterday, according to data provider CMA. A similar measure for Mumbai-based Reliance was 246.

‘First in Line’

Software developer Geodesic’s zero-coupon bonds held by Odyssey mature Jan. 18. They traded around 112 cents on the dollar compared with the redemption price of 138.38 cents, according to data compiled by Bloomberg. The company announced a share buyback of as much as a 25 percent stake on Nov. 27.

Prime Focus may redeem its zero-coupon bonds upon maturity on Dec. 13, Filimonov said. The notes traded near 140 cents on the dollar and are redeemable at 143.63 cents, data compiled by Bloomberg show. Odyssey also owns debt of business outsourcing group Firstsource Solutions Ltd. (FSOL) and cargo transporter Sical Logistics Ltd. (SICL)

“We see India’s market as having very interesting opportunities,” Filimonov said. “We want to be first in the line.”

To contact the reporters on this story: David Yong in Singapore at dyong@bloomberg.net.

To contact the editor responsible for this story: James Regan at jregan19@bloomberg.net

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