Dirty Laundry Holds Clues to Asia Bonds for CreditSightsDavid Yong
In China’s expanding apartment market, Sandra Chow and Cheong Yin Chin have figured out one way to tell whether properties are occupied: drive by and see if people are actually hanging their laundry outside.
Such on-the-ground research helped CreditSights Inc.’s two-woman Asian high-yield and distressed debt team decide to upgrade $3.35 billion of property developer Country Garden Holdings Co.’s dollar-denominated bonds on March 24, believing the selloff triggered by the collapse earlier that month of Zhejiang Xingrun Real Estate Co. was too extreme. Since then Country Garden’s debt has rallied as much as 9.1 percent.
Getting it right when it comes to the region’s riskiest borrowers has never been more important. Asia’s corporate junk bond market has grown to $87.2 billion as of the end of last year from $15.2 billion in 2008, data from Schroder Investment Management Ltd. show. Borrowers in China are selling record amounts of notes and some are starting to miss payments. Indonesia’s Bakrie group is seeking to avert a third default in 17 months while Australia’s Qantas Airways Ltd. lost its investment-grade rating.
“The hunger for yield means bottom-up research is even more important for money managers so they can discern good credits from bad,” said Cheong, 35, who joined CreditSights in December 2012.
Chow and Cheong changed their recommendations on 12 companies and some $12.2 billion of those companies’ bonds this year through June, including Indonesian coal miner PT Bumi Resources and Hidili Industry International Development Ltd. Acting on their correct calls would have generated a 4.9 percent gain on average.
Junk-rated notes in Asia returned 5.8 percent in the first half, according to Bank of America Merrill Lynch indexes. Within that, BB1 to B3 rated credits returned 2.3 percent to 8.9 percent while those deemed distressed at CC to C fell as much as 20 percent. BB1 in the U.S. bank’s composite grading is equivalent to Ba1 at Moody’s Investors Service and BB+ at Standard & Poor’s.
Asian borrowers including China Forestry Holdings Co., PT Bakrie Telecom, Suntech Power Holdings Co. and Suzlon Energy Ltd. have defaulted on at least $2 billion of U.S.-dollar bonds over the past three years. That puts a premium on local knowledge, good access to management and a dose of skepticism, Chow said.
“Bumi’s one example where their accounting raised some red flags,” she said. “When management says they’ve some short-term loans incoming, you have to wonder, ‘Who are they borrowing from given their cash flow problems?’”
The price of Bumi’s 12 percent notes due November 2016 has declined 11 percent since Chow downgraded them to underperform on April 17. The mining company asked creditors for more time to pay its coupon the following month. A bondholders’ meeting held June 20 to restructure $375 million of convertible bonds lacked a quorum, and there’s been no news of any breakthrough ahead of the debt’s maturity next week, Chow said in a report yesterday.
Since overtaking Japan as the world’s second-largest economy in 2010, China has helped fuel a bond-market boom. Of the $116.7 billion of dollar bonds sold in Asia excluding Japan since Dec. 31, $63.7 billion have been from companies in Hong Kong and China. Chinese corporate debt surpassed that of the U.S. for the first time in 2013, S&P said June 15.
With that borrowing comes risk. Although the 7.4 percent growth economists forecast for China this year outstrips the U.S.’s 1.7 percent, it’s the weakest since 1990 and down from as high as 14.2 percent in 2007.
Slowing growth has led to the first onshore default -- Shanghai Chaori Solar Energy Science & Technology Co. missed a bond coupon payment in March -- and the collapse of property and building-materials companies including Shanxi Zhenfu Energy Group and Xuzhou Zhongsen Tonghao New Board Co.
Huatong Road & Bridge Group Co. averted what would have been China’s second bond default on July 23. Company official Geng Naizhuang said in a phone interview with Bloomberg News July 18 that the company was making efforts to raise the funds, with help from local governments.
Many people have been struggling to keep up to date “since the China slowdown story started,” according to Damien Buchet, the Paris-based head of emerging-market fixed income at AXA Investment Managers, which subscribes to reports from rating companies and private research firms. “It’s useful to gather other opinions, especially when they are independent,” he said.
The value of debt in Bank of America Merrill Lynch’s Asian High Yield Index touched $83.8 billion on July 28. It took 15 years to reach half of that, and just three to double in size. Speculative-grade corporate notes in the region have gained 7.1 percent this year, while emerging-market distressed debt globally is up 12.2 percent.
Hidili, Gajah Tunggal
CreditSights, based in New York, was founded by former Deutsche Bank AG analysts in September 2000 and has grown to more than 116 employees worldwide, according to its website. As a research firm that doesn’t underwrite securities or manage assets, it trawls the accounts of more than 850 publicly traded companies and has some 950 institutional clients across the U.S., Europe, Middle East, Asia and Australia.
Chow and Cheong keep an eye on about 30 non-financial companies in Asia, ranging from those ranked just below investment grade to those who can’t repay their debt.
The team has had its share of misses. Chinese coal miner Hidili’s $380 million of 2015 notes have jumped 11 percent since the analysts downgraded them to underperform on April 2 amid a refinancing crunch. PT Gajah Tunggal’s $500 million of 2018 notes were similarly downgraded Feb. 10 as weakness in the rupiah looked set to erode margins at the Indonesian tire maker. Since then, the bonds have advanced 7.7 percent and the currency 5.1 percent.
Chow, 36, joined CreditSights 12 months earlier than Cheong in December 2011, after a 15-month career break following the arrival of her first child. To balance work and family -- her second child was born last year -- she now works a full day Monday and half days the rest of the week.
A linguist by training, Chow says her career in finance began somewhat by accident at JPMorgan Chase & Co.
“I was teaching English in Italy when the chance for an internship with JPMorgan came along,” she said. “When I showed up for the interview they were rather surprised to see a Chinese girl in Milan.”
After almost four years in London with the New York-based lender, and having completed her Chartered Financial Analyst certification in October 2005, Chow returned home to Singapore with Credit Suisse Group AG. Stints at UBS AG and Barclays Plc followed, and she left the U.K. bank in October 2010.
Cheong worked on both the buy and sell side for various financial institutions for almost a decade before taking a job as an analyst on the credit trading desk of Royal Bank of Scotland Group Plc in 2011. She qualified as a CFA in 2006.
“The demands at investment banks can be really tough and it involved a lot of travel for client and company meetings,” Chow said from a coffee shop near CreditSights offices, located in an area of the city’s central business district framed by pastel-colored shop houses and hawker kitchens. “They’ve become more flexible on working hours but it’s still ‘Okay, do a four-day week, but please can you go for this meeting in Guangzhou on Monday?’”
Face-to-face meetings and site visits will only grow in importance, she said. Moody’s predicts speculative-grade defaults in Asia outside Japan will climb to 2.9 percent in 2014, meaning two or three more companies it tracks may miss payments this year, according to a June 6 report.
Chinese property developers meanwhile face a record surge in maturing debt next year, Bloomberg data show, as the country’s banking regulator says it’s monitoring any fallout from the cooling real-estate market. Moody’s forecasts a zero to 5 percent increase in property sales in the 12 months to June next year, with risks to that outlook “skewed to the downside,” it said in a report today.
Home sales in China slid 10.2 percent by value in the first five months of the year, the statistics bureau said June 13, and would-be buyers are being offered no-money-down purchases to clear stock. A survey of 28,000 households in 29 provinces indicated 22 percent of urban dwellings were vacant in 2013, Gan Li, a director of the Survey & Research Center for China Household Finance said in Beijing June 10.
“I expect the property sector to face some headwinds, but not wild swings, this year,” said Cheong, who spent a week visiting developers and touring their projects in late June. “One has to be vigilant about monitoring the high-yield names there because they could have sizeable impact on the Asian market.”