There’s little relief in sight for China’s beleaguered junk bond market but at least one fund manager thinks it’s time to buy.
(Bloomberg) — There’s little relief in sight for China’s beleaguered junk bond market but at least one fund manager thinks it’s time to buy.
Some high-yield bonds are attractive as prices have fallen enough and China’s growth is likely to pick up, according Dhiraj Bajaj, Lombard Odier (Singapore) Ltd.’s head of Asian fixed income. Prospects are less favorable for distressed names, he said.
Prices of certain bonds have dropped sufficiently for there to be “strong value” that’s never been seen before, Bajaj said in an interview. “Many of these performing high-yield bonds will comfortably mature over the next 12 to 24 months in an environment where China growth is cyclically going to improve this year.”
Bajaj, who helps oversee more than $5 billion of assets, bought more bonds of logistics firm GLP China Holdings Ltd. and its parent from the fourth quarter of last year when some of their investment-grade dollar notes traded well into high-yield territories. He also scooped up the debt of conglomerate Dalian Wanda Group Co. this month after boosting holdings in January. The purchases come even as some of the firms’ dollar bonds registered large price swings this year amid liquidity concerns.
Bajaj has also boosted holdings of debt from Seazen Group Ltd., Fosun International Ltd. and West China Cement Ltd. as the bonds have been “unnecessarily sold down.”
Lombard is an outlier in the Chinese junk bond space where bearish calls have piled up after Beijing’s deleveraging campaign sparked a record amount of offshore defaults in the past two years. Hopes that an economic rebound will revive the market are fading after recent stimulus measures by authorities left traders underwhelmed.
China’s crackdown on excessive debt has largely choked off dollar funding for junk borrowers, with some issuers’ notes trading as low as 25 cents on the dollar even though they have never delayed any public payment. A Bloomberg index tracking Chinese high-yield dollar bonds is down more than 5% so far in 2023 after declining more than 20% in each of the past two years.
“They are companies that have good fundamentals, assets and operations,” said Bajaj. “Their credit liquidity can be poor only because of limited refinancing channels, not because their solvency is in question.”
In contrast, Bajaj is less upbeat about distressed names which “eventually have little recovery value in our opinion and this is a space that we avoid.”
Some of Bajaj’s optimism in high-yield credit is rooted in China’s efforts to revive economic growth this year. Bloomberg News reported last week that authorities are weighing a broad stimulus package designed to support areas such as real estate and domestic demand after lowering a short-term policy interest rate.
Markets are “underestimating the potential policy support that could come out in the short term,” said Bajaj.
“There is a significant sense of fatigue by buyside and fund managers, and ability to stomach risk by investors is a lot less,” said Bajaj. “But these are times when value moves from impatient investors to patient investors.”
(Updates with fund manager’s comments in the second and penultimate paragraphs)
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