Emerging Distressed Debt Rallies on Boost From China's Easing

  • Notes rally as commodity prices stabilize in October
  • Odebrecht, Honghua, DTEK debentures generate 30% return

Investors are savoring the best monthly returns on distressed debt from emerging markets since April, after China’s monetary easing, stabilization in commodities and a rating upgrade for Ukraine sparked a rally.

The notes jumped 10 percent in October to reverse a four-month slump, while global high-yield securities gained 3.09 percent, according to Bank of America Merrill Lynch indexes. The rebound added $9 billion to the market value of 204 bonds in the emerging-market gauge, boosting the average price to 68.75 cents on the dollar from 62.85 cents.

China’s central bank cut borrowing costs again last month to boost an economy that’s growing at the slowest pace since 1990, while the European Central Bank has hinted at more stimulus in December. Oil contractors including Odebrecht SA of Brazil and Honghua Group Ltd. of China advanced with debt from Ukraine entities.

“The price action is totally different from before September,” said Kim Jinha, head of global fixed income at Mirae Asset Global Investments Co. in Seoul. “The stimulus has definitely” supported the market, he said. While Mirae doesn’t invest in distressed credits, it has boosted allocation on emerging-market debt to about 10 percent from 5 percent this year, he added.

Stabilization

The Bloomberg Commodity Index dropped only 0.45 percent in October, following a 3.4 percent loss in September, with oil prices stabilizing near $45 a barrel. Odebrecht’s 6.35 percent 2021 notes surged 36 percent from Sept. 30, while Sichuan-based Honghua’s 7.45 percent 2019 debentures gained almost 30 percent, according to Bloomberg-compiled prices.

Ukraine is set to end a seven-month effort to restructure its debt after handing better terms to a committee of foreign creditors led by Franklin Templeton, prompting Standard & Poor’s to raise its rating on Oct. 20. That may ease access to a $17.5 billion International Monetary Fund bailout money Ukraine needs to revive its war-torn economy. Coal producer DTEK Energy BV’s 7.875 percent 2018 notes gained 29 percent.

Oaktree Capital Group LLC, which runs the world’s biggest distressed debt fund, completed its first China distressed fundraising on Oct. 28. Co-founder Howard Marks said it’s a better time to invest in Asia’s biggest economy because of falling asset prices and weak sentiment.

“Prices have corrected, values are improved, and the short-run may continue to see volatility, but the most important question is whether China and the rest of Asia will be above average growers in the long-run,” Marks said in a statement released in Beijing on Oct. 28. “And we believe they will.”

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