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.
1
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
2
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);
3
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;
4
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.
5
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.