Vedanta Distress Hands 42% Gain to Funds Braving Commodity Storm

  • Vedanta, JSW, Tata Steel bonds among top gainers last quarter
  • Bloomberg Commodity Index climbed 22 percent from January low

Junk bonds in India capped their best quarter in more than four years as Vedanta Resources Plc’s dollar debt rallied from distressed levels, rewarding investors who rode out a commodity slump.

High-yield dollar debt from Indian firms rose 7.8 percent last quarter, the most since 2012 and beating the 4.3 percent gain in Chinese notes, Bank of America Merrill Lynch indexes show. Mining group Vedanta and JSW Steel Ltd. led the advance as the Bloomberg Commodity Index gained 22 percent this year from an 18-year low in January. Lombard Odier and BEA Union Investment Management say the outlook is improving as resource prices recover.

The rally has vindicated investors who called a buy during the commodity-market slump in 2015 despite refinancing risks for Indian borrowers. Vedanta has repaid more than a third of its bonds maturing in 2016, while Tata Steel Ltd. put up its European steel unit for sale to stem losses. JSW Steel Ltd. profited from a state move to curb cheap imports.

“Global bond investors have proved to be far too skittish versus domestic Indian bank lenders, whereby the latter rate these credits through the cycle rather than at the mercy of the ticker tape of commodity prices,” said Dhiraj Bajaj, a money manager at Lombard Odier (Singapore) Ltd., whose fund owns Vedanta and JSW notes. “The sharp decline in bonds has presented a once-in-a-cycle buying opportunity.”

Bajaj sees support for resources companies from the government’s spending on highways and protection against dumping. The economy may grow 7.7 percent in the year through March 2017, based on the median forecast in a Bloomberg survey, versus 7.9 percent expansion last year.

Vedanta’s 8.25 percent 2021 notes traded at 85.4 cents on the dollar to yield 12.4 percent as of 4:02 p.m. in Hong Kong, according to Bloomberg-compiled prices. They returned 42 percent last quarter. JSW Steel’s 4.75 percent 2019 notes, which gained 8.7 percent last quarter, rose 0.4 cent to 93.3 cents.

Indian junk bonds yield 641 basis points more than Treasuries, according to the Bank of America index. While the spread has narrowed from a post-crisis high of 1,115 in January, it’s still above the three-year average of 569. Emerging-market debt funds saw record inflows in the week ended July 6, EPFR Global data show.

“It will still be attractive from a carry point of view,” said Pheona Tsang, head of fixed income at BEA Union Investment in Hong Kong. Her firm, which manages $6.8 billion of assets, is overweight on India.

Positive Sentiment

Mumbai-based Vedanta, founded by billionaire Anil Agarwal, spent $686 million to buy back its bonds due in 2016. S&P Global Ratings raised its outlook on the company’s B rating to stable from negative on April 4.

“The mood is positive now after they tackled the 2016 maturity risk and prices for oil and metals have improved,” said Sudip Shah, the chief executive of London-based Orbit Investment Securities Services Plc. “Risk appetite is getting better with India’s economy growing at 7-plus percent.”

Zinc and crude oil prices have both rallied by more than a fifth this year, and are forecast to rise through 2018 in Bloomberg surveys. Steel prices in India are 16 percent higher this year after imports plunged on state curbs.

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“Credit quality for metals and mining companies has been supported by a better pricing environment, a focus on increasing production and a cutback in capital expenditure,” said Mehul Sukkawala, S&P’s lead analyst for South Asia corporates. Further improvement requires a pickup in domestic demand, which remains “somewhat subdued,” he said.

Auto-parts supplier Motherson Sumi Systems Ltd. sold $300 million of 2021 notes in June, attracting $1.1 billion of orders in the first junk-bond offering from India since April 2015. That raised hopes for a rebound in issuance after local companies sold $2.94 billion of dollar bonds this year, down from $7.2 billion in the year-earlier period, according to Bloomberg data.

“This was a significant transaction from India and hopefully signals the re-opening of the high-yield market,” said Amit Singh, a Hong Kong-based partner at Allen & Overy, which gave Motherson legal advice.

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