Vedanta’s 132% Bond Return From Abyss Has Funds Expecting More

  • Lombard Odier boosted holdings, while BEA and AGF held tight
  • ‘Recovery in commodities has been a big tailwind,’ AGF says

Vedanta Resources Plc rewarded its bravest bond holders with a 132 percent return for sticking with the group after its financial distress in 2015. As commodity prices rebound, some investors say the rally isn’t over.

The gains came as Vedanta notes approached par value from as low as 44.56 cents on the dollar in January, a surge that helped push Indian dollar junk bonds toward their best performance since 2012, according to a Bank of America Merrill Lynch index. Lombard Odier (Singapore) Ltd. recently bought more securities, while Invesco Ltd. sees more upside as the nation’s biggest aluminum and zinc producer focuses on paring debt.

Billionaire Anil Agarwal’s London-listed group is seeking to merge energy and mining units, which HSBC Holdings Plc said will give it access to $3.5 billion in cash. Vedanta also won access to a healthy dividend after buying a 35 percent stake in Hindustan Zinc Ltd. from the government in March. Moody’s Investors Service raised its rating on Vedanta for the first time since 2013 as lenders gave it more time to comply with debt covenant tests.

“We continue to be investors in Vedanta and have recently increased our holdings,” said Dhiraj Bajaj, portfolio manager at Lombard Odier in Singapore. “We expect markets to now look towards Vedanta to term out their debt maturity profile and refocus on asset growth.”

Vedanta’s 8.25 percent June 2021 notes traded at 99.24 cents on the dollar on Sept. 15, after seven months of gains, Bloomberg-compiled prices indicate. The planned merger of its its oil and mining units was approved by shareholders this week.

The simplified corporate structure will better align interests among shareholders for the creation of long-term, sustainable value, Agarwal said in a Sept. 12 filing, targeting the green light from authorities by the end of March.

“They will benefit further with regulatory approval to the merger and potential capital market refinancing,” said Pheona Tsang, a money manager at BEA Union Investment Management Ltd. in Hong Kong. “We still like the bonds as they still offer value over global peers.”

Buying Opportunity

HSBC wrote in a Sept. 13 note that any widening in Vedanta spreads is a buying opportunity, though its outsized performance is likely over as valuations are now in line with regional peers. Philip Wickham, the bank’s Singapore-based credit analyst, cautioned that liquidity remains stressed pending approval of the merger.

Zinc and crude oil prices have both rallied by more than 18 percent this year, and are forecast to rise through 2017 in Bloomberg surveys. The Bloomberg Commodity Index rose 6 percent this year.

“The recovery in commodities has been a big tailwind over the past few quarters,” said Tom Nakamura, a fund manager at Toronto-based AGF Management Ltd.

At 8.44 percent yield, the 2021 notes offered 722 basis points more than similar-maturity Treasuries, according to Bloomberg data, while the company’s 6 percent January 2019 notes yielded 7.21 percent or a 606 basis points spreads. Moody’s upgraded Vedanta notes to B3 from Caa1 on Sept. 13 while S&P Global Ratings raised its B rating outlook to positive from stable on the same day.

“From a valuation perspective and despite its run up, a 600-basis point spread for a single B credit with some trajectory is an appealing asset,” said Jorge Ordonez, emerging-market bond manager in Atlanta at Invesco. “Working in favor of the company are technical factors including the dearth of high-yield issuers in India, valuation and potential upside to metals prices.”

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