SC Lowy - 2014 Review and 2015 Anticipated Trends

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Australia mining and mining services corporate high yield bonds also .... renewable energy which we anticipate will lead
2014 YEAR IN REVIEW

2014 in Review Overview 2014 was filled with a combination of drama and excitement in the Asia-Pac credit markets and it would truly be an understatement to merely say that it was volatile year. The year began upbeat with supportive Fed and ECB policies, strong cash inflows and plenty to invest in with a record amount of new issuances streaming out from eager corporates (and bankers), secondary loans abundant and private deals brewing. Throughout the year, we continuously saw investors shift tastes from distressed to high yield to investment grade to private transactions depending on prevailing market conditions. We witnessed both stable markets (early 2014 and summer) and very volatile markets (March and December) in high yield bonds driven by political, macro and one-off corporate events. In the illiquid loan and claims trading market, there were far fewer opportunities in AsiaPac than in 2013 resulting in crowded markets and a chase forever declining yields and IRRs. Consequently, Middle East secondary loan situations moved front and center with many having been restructured post the Global Financial Crisis, but yet were still mispriced. When the month of December rolled in, it entered angry and swinging hard - a slowing China, oil, coal, iron ore and other commodity price collapses, increased political risk (Russia, Greece, Ukraine, Middle East, etc…), decreased secondary market liquidity and other factors – all led to a very turbulent holiday season and somewhat disappointing yearend. We enter 2015 amidst uncertain times with volatile equity, bond and derivatives markets. Investment pioneer John Templeton said it best when he stated that: “The time of maximum pessimism is the best time to buy and the time of maximum optimism is the best time to sell.” Is now the time to identify and invest in the opportunities Mr. Templeton is speaking to or is it best to take a “wait and see” cautious approach to the start of the new year? We suspect investors to partake in a bit of both! But first, a quick recap of 2014 before moving on to 2015.

Asia-Pac High Yield / Distressed Bond Market – 2014 Asia-Pac once again had an impressive year in its corporate bond markets. There were 79 Asia-Pac (ex-Japan) G3 corporate high yield bond issuances in the amount of USD 30.8 billion, a 17% increase year-on-year. In addition, the principal amount of Asia-Pac (exJapan) G3 investment grade new issuances grew by 55% year-on-year to USD 144.5 billion with 250 new issuances. To put this into perspective, just a short 5 years ago (in 2009), there was just USD 6.2 billion of Asia ex-Japan G3 corporate high yield new issues with only 12 issuances and USD 42 billion of Asia ex-Japan G3 investment grade with just 50 new issuances! Another area of growth in Asia-Pac was seen in the offshore CNY bond market, which comprised CNY 424.1 billion (~USD 68.3 billion) via 920 new issuances in 2014, a 51% increase from 2013 and 145% increase since 2012! These are clear examples of the impressive growth rate in the Asia-Pac primary market that has led to a plethora of bonds to trade in the Asia-Pac secondary market. A prudent investor looking to diversify his/her global portfolio can no longer ignore the rising Asia-Pac corporate high yield market. We expect these trends to continue.

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2014 YEAR IN REVIEW

Emergence of the Asia Pac High Yield Market (2009-14)

Global HY Issuance USD 552bn Global HY Issuance USD 208bn

2009

2014

World 2.7x

Asia Pac (ex Japan) USD 6bn

Asia Pac (ex Japan) 5.8x

Asia Pac (ex Japan) USD 35bn

Market Growth 2009-14

In terms of performance, 2014 began strong for high yield to distressed bonds on the back of a robust new issuance calendar and an active secondary trading market. The first quarter moved along well until volatility crept in via a short-lived sell-off in March that was likely due to what we affectionately refer to as “new issue indigestion”. However, just a few short weeks later, investors felt confident enough in market fundamentals and technicals to once again hit the buy button and the sell-off quickly became a mere afterthought. The markets held up well through the summer months with spreads continuing to tighten and the new issuance machine once again switched on (36 new high yield issuances and 118 investment grade issuances from the end of March through August). By late summer / early autumn, with yields tightening and liquidity drying up, the high yield market was again perceived to be expensive and many investors were happy to sit on the sidelines. However, at the same time, investors continued to eagerly participate in the new issuance market, but tastes shifted from high yield to investment grade (18 high yield issuances versus 77 investment grade issuances from late August through November). In late November and into December, macro and event risk caused increased strain and uncertainty in the markets. For instance, those invested in the China property sector (which, if one invests in Asia-Pac, is virtually unavoidable) witnessed selloffs in Agile in October and Kaisa in December due to what most perceive as the Chinese government’s anti-corruption crackdown that ensnarled each company’s respective chairman and in Kaisa’s case, also led to resignations of its CFO and a director (although no wrong-doing has been alleged yet). This in turn caused sell-offs, not only in Agile and Kaisa bonds, but also in the broader China property sector as investors looked to decrease overall exposure. We also saw significant stress and distress outside of China property, particularly in coal, oil, mining and mining services bonds. The coal sector was under duress all year long due to coal pricing pressure and cash management issues, particularly in names such as Bumi Resources, Berau Coal, Mongolia Mining, Indika Energy, Hidili Industry and Winsway Enterprises. Oil sector bonds suffered drastic collapses in December in names such as Honghua Group, MIE Holdings and Anton Oil following slumping oil prices. Finally, the Australia mining and mining services corporate high yield bonds also spiraled lower, with

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2014 YEAR IN REVIEW

Fortescue, Ausdrill, Emeco, Consolidated Minerals, St. Barbara and others leading the decline. In terms of Asia-Pac “Winners & Losers” for 2014, the top “Winners” included Renhe Commercial Holdings (bond tender), Citic Limited (purchased by Citic), Olam International (fraud allegation quickly followed by Temasek cash injection), Pacnet (strategic sale to Telstra), Jababeka International (new issuance) and Glorious Property Holdings (privatization speculation). The region’s top “Losers” included Kaisa Group, Berau Coal, Honghua Group, Bumi Resources, MIE Holdings and Indika Energy. Prime examples of major price fluctuations in specific high yield / distressed bonds are set forth in the graph below.

2014 Trading Ranges vs Current Prices for Key Issuances Agile 9.875% 2017

Greentown 8.50% 2018

Anton Oil 7.50% 2018

Honghwa 7.45% 2019

Ausdrill 6.875% 2019

Hyva 8.625% 2016

Barminco 9% 2018

Indika Energy 7% 2018

Berau Coal 12.50% 2015

Jaiprakash Power 5% 2015

Berau Coal 7.25% 2017

Kaisa 12.875% 2017

Bhakti 5.875% 2018

Kaisa 8.875% 2018

Bumi Resources 10.75% 2017

Miehol 7.50% 2019

Consolidated Minerals 8% 2020

Mongolia Mining 8.875% 2017

Emeco 9.875% 2019

Pacnet 9% 2018

Evergrande 8.75% 2018

Paladin 6% 2017

Fantasia 10.625% 2019

St. Barbara 8.875% 2018

Fortescue 8.25% 2019 0

20

40

60

80

100

120

Vedanta 6% 2019 0

20

40

60

80

100

120

Note: Bars depict trading ranges between 1 January 2014 and 9 January 2015. Red diamonds mark 9 January 2015 closing prices.

The outlook for the high yield / distressed corporate bond sector for 2015 is murky at best. In the China property sector, we begin the year with USD 2.5 billion of Kaisa bonds plummeting to levels never thought possible (mid-30s at the time of this publication) and everyone trying to determine “who’s next to crumble” as well as re-assessing general exposure overall. In the coal space, Berau Coal and Bumi Resources restructurings are looming, while multiple other coal players continue to scramble to conserve cash, decrease capex and assess refinancing needs. We expect new issuances in investment grade corporate bonds and CNY offshore bonds to continue to be robust. However, high yield new issuances will be tempered until the market sees greater clarity in the Kaisa situation and the return of positive overall market sentiment. Until such time, we expect volatile secondary markets to persist so buckle your seatbelts and hold on tight, this start of the new year is not for the faint of heart!

Asia-Pac Secondary Loans and Claims Market - 2014 The stressed/distressed secondary loan and claims market was far less active in 2014 with a few carry-over situations from 2013 and only a handful of new opportunities. We were primarily active in shipping, the Middle East and Australia. Particular active situations included: Middle East

A’ayan Leasing, Adeem Investment., Al Jaber Group, Arcapita, Awal Bank, Drydocks World, Dubai World, EFAD, Global Investment House, Oasis (TID), and The Investment Dar (TID);

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2014 YEAR IN REVIEW

Australia

BIS Finance, BrisConnections, New Zealand Yellow Pages (YPG) and Rivercity; and

Other Asia Pac

Berlian Laju Tanker (BLT) (Indonesia), Elpida Memory (Japan), Nautilus Shipping, Reliance Communications (India), Stemcor (Singapore), STX Pan Ocean (South Korea) and Today Makes Tomorrow (TMT) (Taiwan).

Our trading volume increased 45% year-on-year in a stagnant overall secondary loans and claims market reflecting our emergence as a dominant player in this space. We expect the number of interesting secondary loan and claims opportunities in to grow in 2015.

European Secondary Loans and Claims Market – 2014 In terms of overall volumes in the secondary distressed loans and claims market, 2014 was relatively stable. Demand continued to outstrip supply with an ever increasing pool of capital chasing a limited number of opportunities, many of which were carry-overs from previous years. Availability of cheap financing helped delay company defaults, further limiting supply. With regard to pricing, the supply/demand imbalance contributed to price increases across the year, with some notable exceptions, such as credits in the retail sector. Activity spanned across numerous countries (particularly Spain, France, UK and the Netherlands), sectors (namely, real estate, shipping, construction, media, retail, and business services) and types of transactions (ranging from plain vanilla secondary investments through loan-to-own). Notable situations included: Spain

Martinsa Fadesa (where SC Lowy traded the first loan block), Fagor, Habitat, Promotora de Informaciones (PRISA), San Jose, Cortefiel and Bodybell;

France

Vivarte, Camaieu, Pages Jaunes, Latécoère and JOA Group (Moliflor);

UK

Cory, PHS, Stemcor, Tunstall and Ideal Standard;

Netherlands

VGG (former AVR) and Autobar Group;

Italy

SEAT and Limoni SpA;

Central/Eastern

Alpine Bau (where SC Lowy was the leading trader of claims), Mechel and

Europe

Interpipe; and

Shipping

Nautilus (where SC Lowy traded a significant portion of the syndicate), Zim (where SC Lowy traded instruments both pre- and post- restructuring), OW Bunker and Torm.

We anticipate the following trends in 2015: 

Continuing shift in supply of opportunities from UK and Northern Europe to Southern/Eastern Europe;



Continuing disposal of real estate loans and assets particularly in Spain (and beginning to take place in Italy);



Further legislation prompting bank disposals, for example, Spanish legislation relating to renewable energy which we anticipate will lead to significant opportunities in 2015;

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2014 YEAR IN REVIEW



Eagerness among investors to look at smaller “under the radar” situations in addition to large capital structures;



Continued expansion of direct lending by funds;



Increasing number of bond restructurings vs. loans; and

 New opportunities triggered by the decline in commodity/energy prices and the digestion of the AQR results.

SC Lowy Update At SC Lowy, we celebrated our 5 year anniversary by accomplishing phenomenal growth in 2014 across all existing businesses, as well as adding exciting new ventures. We continue to be the only independent fixed income specialist with full investment banking capabilities in the Asia-Pac region. We significantly increased trading volume, research coverage and headcount globally across the firm to better service our clients. We increased our trading volume in high yield to distressed bonds by 47% year-on-year, making us one of the major dealers and liquidity providers in the Asia-Pacific region. On the loans/claims trading side, even with fewer investment situations in 2014, we still increased our volume 45% from 2013, ranking us as one of the top trading houses in Asia-Pacific with approximately 30% market share. We currently service a vast array of clients numbering over 500 across the globe, from institutional and retail investors to hedge funds and family offices. In terms of headcount, we now stand at 36 employees after adding 5 to our ranks in 2014. Our global desk analyst team consists of 12 professionals or one third of our headcount, making them one of the largest desk analyst teams in the Asian high-yield / distressed fixed income market. We transformed our London office from solely a distribution platform for Asia-Pac / Middle East opportunities into a fully-fledged European distressed business and opened a branch in Australia. The London office now consists of European focused sourcing, trading, distribution and research teams as we anticipate continued opportunities into 2015 and beyond. We also launched a convertible bond trading platform and participated in our first high yield primary issuance as a joint lead manager and underwriter in connection with Redco Properties USD 125 million 13.75% 2019 bond. Building on that success, in 1Q15 we are adding a debt capital markets team to bolster our public bond primary issuance capabilities as well as sourcing private special situations. Korea remains one of our most important markets following our acquisition of a Korean savings bank in late 2013 and the USD 100 million DIP financing we provided to Korea Line to assist with their exit from bankruptcy. We are currently in the process of completing the acquisition of a second savings bank which will result in SC Lowy as the controlling shareholder of a growing institution with 59 employees. For 2015, we anticipate continued growth and success in Asia-Pac, Europe and the Middle East in our high-yield through distressed bond trading, convertible bonds and secondary bank debt / claims trading businesses as well as leading many more public and private primary debt deals.

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ASIA PAC HIGH YIELD ISSUANCE 2014

Issuer

Ticker

Coupon

Maturity

Rating

Australia High Yield

Size (USDm) 1,725

Issuer

Ticker

Coupon

Maturity

Rating

Asia Industrials High Yield (continuted)

Artsonig Pty Ltd

ARTSNG

11.5

2019

CCC+

250

Consolidated Minerals

CSMAU

8

2020

B

400

China XD Plastics (Favor Sea Ltd)

Emeco Pty Ltd

EHLAU

9.875

2019

B+

335

Size (USDm) 29,577

CHINA (continued)

7,029 CXDC

11.75

2019

BB-

150

Chong Hing Bank Ltd

CHOHIN

6.5

PERP

BB

300

Mirabela Nickel Ltd

MBNAU

9.5

2019

N/A

115

Citic Ltd.

CITPAC

6.8

2023

BBB+

400

Transfield Services Ltd

TSEAU

8.375

2020

B+

325

Citic Ltd.

CITPAC

6.625

2021

BBB+

250

Virgin Australia Holdings Ltd

VAHAU

8.5

2019

B-

300

Geely Automobile Holdings Ltd

GEELY

5.25

2019

BB

300

HONHUA

7.45

2019

BB-

200

BB

739 2,940

Honghua Group Ltd

China Property

9,940

ICBC

ICBCAS

Variable

PERP

Agile Property Holdings Ltd

AGILE

8.375

2019

B+

500

ICBC

ICBCAS

Variable

PERP

BB

China Aoyuan Property Group Ltd

CAPG

11.25

2019

B-

300

Maoye International Holdings Ltd

MAOIH

7.75

2017

BB-

300

China South City Holdings Ltd

CSCHCN

8.25

2019

B+

400

MIE Holdings Corp

MIEHOL

7.5

2019

B

500

CIFI Holdings Group Co Ltd

CIFIHG

8.875

2019

B

200

West China Cement Ltd

WESCHI

6.5

2019

B+

400

Country Garden Holdings Co Ltd

COGARD

7.875

2019

BB

550

Yancoal International Trading Co Ltd

YZCOAL

Variable

PERP

BB

300

Yingde Gases Investment Ltd

YINGDZ

7.25

2020

BB-

Country Garden Holdings Co Ltd

COGARD

7.5

2019

NR

250

Fanhai (Oceanwide Real Estate)

FANHAI

11.75

2019

B

320

INDIA

250 4,806

Fantasia Holdings Group Co Ltd

FTHDGR

10.625

2019

B-

300

Century Ltd

IBREL

10.25

2019

B+

175

Franshion Brilliant Ltd.

FRANSH

5.75

2019

BBB-

500

GCX Ltd

GCX

7

2019

BB-

350

Future Land Development Holdings Ltd

FUTLAN

10.25

2019

B+

350

Greenko

GKOLN

9

2019

B

550

Greenland Hong Kong Holdings Ltd

GRNLHK

4.375

2017

BB+

500

JSW Steel Ltd

JSTLIN

4.75

2019

BB+

500

Guangzhou R&F (Trillion Chance Ltd)

GZRFPR

8.5

2019

BB-

1,000

Rolta LLC

RLTAIN

10.75

2018

BB-

300

Jingrui Holdings Ltd

JINGRU

13.625

2019

B-

150

SM MTH Auto Group

MSSIN

4.125

2021

BB+

681

Kaisa Group Holdings Ltd

KAISAG

9

2019

CC+

400

Tata Motors Ltd

TTMTIN

4.625

2020

BB

500

Kaisa Group Holdings Ltd

KAISAG

8.875

2018

CC+

250

Tata Motors Ltd

TTMTIN

5.75

2024

BB

250

KWG Property Holding Ltd

KWGPRO

8.975

2019

B+

600

Tata Steel (ABJA Investment Co.)

TATAIN

4.85

2020

BB

500

KWG Property Holding Ltd

KWGPRO

8.25

2019

B+

400

Tata Steel (ABJA Investment Co.)

TATAIN

5.95

2024

BB

1,000

Logan Property Holdings Co Ltd

LOGPH

11.25

2019

B+

300

Logan Property Holdings Co Ltd

LOGPH

9.75

2017

NR

250

Alam Sutera (Alam Synergy Pte Ltd)

ASRIIJ

9

2019

B+

225

Modern Land China Co Ltd

MOLAND

12.75

2019

B

125

Jababekah International BV

KIJAIJ

7.5

2019

B+

190

Redco Properties Group Ltd

REDPRO

13.75

2019

B

125

Lippo Karawaci (Theta Capital Pte Ltd)

LPKRIJ

7

2022

BB-

150

Shimao Property Holdings Ltd

SHIMAO

8.125

2021

BB-

600

Mitra Pinasthika MSTK TBK

MPMXIJ

6.75

2019

B+

200

Sunac China Holdings Ltd

SUNAC

8.75

2019

B+

400

Modern Land (Marquee Land Pte Ltd)

MDLNIJ

9.75

2019

B

191

Sunshine 100 China Holdings Ltd

SUNCHN

12.75

2017

B-

215

Multipolar (Pacific Emerald)

MLPL

9.75%

2018

B+

30

Times Property Holdings Ltd

TPHL

12.625

2019

B

305

Pakuwon Jati (Pakuwon Prima Pte Ltd)

PWONIJ

7.125

2019

B+

200

INDONESIA

1,956

Wuzhou International Holdings

WUINTL

13.75

2018

B

100

Pelabuhan Indonesia III PT

PLBIII

4.875

2024

BB+

500

Yuzhou Properties Co Ltd

YUZHOU

8.625

2019

B

300

Sritex (Golden Legacy PTE Ltd.)

SRIRJK

9

2019

B+

270

Yuzhou Properties Co Ltd

YUZHOU

9

2019

B

250

Banglalink Digital Comm

BBLINK

8.625

2019

B+

300

29,577

Chalieco Hong Kong Corp

CHALUM

Variable

PERP

BB

300

8,604

Krung Thak Bank

Asia Industrials High Yield CHINA BCP Singapore VI Cayman Financing Co LTD PACT

OTHER

8

2021

BB-

275

National Savings Bank

3,725

KTB

Variable

2024

BB

700

NSBLK

5.15

2019

BB-

250

China CITIC Bank Intl Lt

CINDBK

Variable

PERP

BB-

300

Nexteer Automotive Group Ltd

NEXTHK

5.875

2021

BB+

250

China Hongqiao Group Ltd

HONGQI

7.625

2017

BB

400

Puma Energy Australia

PUMAFN

6.75

2021

BB

1,000

China Hongqiao Group Ltd

HONGQI

6.875

2018

BB

300

Sri Lankan Airlines Limited

SRAILT

5.3

2019

B+

175

China Oil & Gas Group Ltd

CHIOIL

5

2020

BB+

300

Wynn Macau Ltd

WYNN

5.25

2021

BB

750

LEGAL DISCLAIMER

This market review (“Market Review”) is being furnished on a confidential basis only to existing clients of SC Lowy and its affiliates (collectively, “SC Lowy”). This Market Review was prepared and/or being disseminated out of Hong Kong to clients of SC Lowy Financial (HK) Limited and was prepared and/or being disseminated out of London to clients of SC Lowy Asset Management (UK) Limited. Other than disclosures relating to SC Lowy, information in this Market Review is based on current public information that we consider reliable, but we do not represent it is accurate or complete, and it should not be relied on as such. This Market Review is neither an invitation nor an offer to make an investment or to purchase any investment product or engage in any service (the “Products and Services”) offered through SC Lowy. SC Lowy clients should not construe the contents of this Market Review as legal, tax, investment or accounting advice. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. The price and value of investments referred to in this Market Review and the income from them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Fluctuations in exchange rates could have adverse effects on the value or price of, or income derived from, certain investments. Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients that reflect opinions that are contrary to the opinions expressed in this Market Review. Our asset management area and investing businesses may make investment decisions that are inconsistent with this Market Review. We and our affiliates, officers, directors, and employees will from time to time have long or short positions in, act as principal in, and buy or sell, the securities, if any, referred to in this Market Review. The information contained herein should be treated in a privileged and confidential manner and may not be reproduced or used in whole or in part for any other purpose, nor may it be disclosed without the prior written consent of SC Lowy. Any unauthorized use, duplication or disclosure of this Market Review is prohibited by law. In considering any prior performance information contained in this Market Review, SC Lowy clients should bear in mind that past performance is not necessarily indicative of future results and there can be no assurance that SC Lowy’s products will achieve comparable results or be able to avoid losses, that targeted returns will be met, or that SC Lowy will be able to make or offer services in connection with investments similar to the historic investments presented herein because of, among other things, economic conditions and the availability of investment opportunities. The distribution of this Market Review may be restricted by law in certain jurisdictions. This Market Review does not constitute an offer to sell or the solicitation of an offer to buy in any jurisdiction to any person to whom it is unlawful to make such offer or solicitation in such jurisdiction. SC Lowy clients should inform themselves as to the legal requirements and tax consequences within the countries of their citizenship, residence, domicile and place of business with respect to the acquisition, holding or disposal of an investment in SC Lowy’s products and any foreign exchange restrictions that may be relevant thereto.