Yuan-Spurred Drop in Chinese Junk Debt Not a Buy for Nikko

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Chinese junk dollar bonds haven’t fallen far enough to make them a buy after the nation’s currency slumped this week by the most in two decades, according to Nikko Asset Management Co.

The extra premium over Treasuries investors demand to own such securities jumped 21 basis points, the biggest one-day jump in almost three weeks, to a one-month high of 776 Wednesday, a Bank of America Merrill Lynch index shows, after the central bank allowed the yuan to depreciate by a record. Yields on Agile Property Holdings Ltd. and Evergrande Real Estate Group Ltd. notes climbed more than 30 basis points as the currency recorded its steepest two-day loss since 1994.

“This market has been a safe haven from the selloff in Asian high-yield bonds in recent weeks and we’re only seeing some early signs of weakness from the yuan moves,” Leong Wai Hoong, who manages Asian high-yield investments at Nikko Asset, said, adding that if bond prices drop further, he’d be looking to buy. Nikko Asset manages some $162 billion.

Chinese U.S. currency junk bonds have returned 1.2 percent since June 15, when equity markets in Asia’s biggest economy began to slide. The Shanghai Composite Index is down 24 percent from its June 12 peak and registered its biggest one-day drop since February 2007 last month. High-yield notes may still come under pressure if the yuan’s weakness leads to more capital outflows, Leong said.

‘Seems Manageable’

The average price for Chinese junk bonds has dropped 0.37 cents since Monday to a one-month low of 98.26 cents on the dollar, the Bank of America Merrill Lynch index shows. The yuan weakened 0.9 percent to 6.4415 per dollar as of 10:19 a.m. Thursday.

Agile’s 8.875 percent notes due 2017 have returned 1.7 percent over the past month, Bloomberg-compiled prices show. They dropped to 100.93 cents on the dollar Wednesday, the lowest in almost two weeks. Country Garden Holdings Co.’s 7.5 percent debentures due 2020 slipped 0.94 cents to 103.58 cents on the dollar, paring gains to 1.1 percent over the period.

Chinese companies should also fare better than their Asian counterparts amid currency pressures even though some may book foreign exchange losses this quarter, Leong said.

Home builders, the biggest issuers of dollar bonds in recent years, generally have large profit margin buffers to absorb additional interest expenses, plus have access to onshore bond and loan funding sources to mitigate the impact of an increase in dollar costs, he said.

“It seems manageable for Chinese credit despite the yuan moves for now,” said Leong, who also said the yuan’s decline hasn’t raised his expectation for bond defaults. “The worst case would be a major selloff in emerging markets due to competitive easing. In that scenario, other areas would be even more vulnerable than Chinese credits.”

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