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June 2021

  • Asian USD HY Bond market had a very weak month in June, driven mostly by negative price action in the Chinese property sector
  • Chinese developers’ credits continued to see further polarization with lower yielding BB names materially outperforming single B names.
  • Evergrande bonds particularly soft as headline risk impacted the name weighing heavily on sentiment for the whole sector
  • Non-China names were significantly more positive last month, underpinned by a raft of high price tender offers launched by several companies.
  • JKC Asia Bond 2023 outperformed wider Asian HY market largely due to our single name exposure limits which resulted in an underweight of underperforming high beta property names
  • The JKC Asia Bond 2023 fund ended June with an average yield of 8.9% while duration continued to come down (currently 1.2 years), issuer line items ended the month at 127 (across 177 positions).

In June 2021, the JKC Asia Bond 2023 fund produced a total return of -1.07%. This return was broken down by +54bps from carry, -152bps from bond price movements and -9bps from fees. The month of June was very weak for Asian HY bonds, mainly stemming from a significant sell off in the Chinese Property Sector. Despite this, the JKC Asia Bond 2023 was able to outperform the wider market (outperforming the AHBI Index by 39bps) as the portfolio continues to adopt a disciplined approach to diversification and hence an underweight of large cap high beta names which saw the biggest negative impact over the month.

In the Chinese property space, we continued to see an increasing divergence between BB names and the weaker single B names. Leading the underperformance was Evergrande (EVERRE) bonds as news that the company was downgraded by both Moody’s and Fitch as well as various informal internet rumours regarding tightening onshore liquidity weighed heavily on the name. We continue to believe the selling has been largely technical and mostly sentiment driven, however as the largest issuer in the Asian HY market, Evergrande has always been highly sensitive to headline risk. Interestingly the market continues to ignore positive news regarding the credit fundamentals on the name and in particular the company’s recent tangible steps to de-lever its balance sheet. Indeed, according to Reuters, EVERRE reported that its interest-bearing debt had fallen to CNY 570bn (USD 88.2bn) at the end of June 2021 from CNY 716.5bn (USD 110.9bn) reported on 31 December 2020. In addition, the company last month paid down its USD1.4bn June 2021 bonds with internal cash. We do maintain a significant underweight to the Evergrande curve in the 2023 fund although we do not see default risk on the name as imminent. 

Meanwhile as a benchmark name, EVERRE weakness unsurprisingly dragged down the rest of the property sector with single B names such Fantasia (FTHDGR), China South City (CSCHCN), Risesun (RISSUN), Yuzhou (YUZHOU) and Greenland (GRNLGR) among those most impacted. Elsewhere, stressed property developer Sichuan Languang (LGUANG) bonds dropped 20 points last month as the company was not successful in securing a white knight investor following months of talks with at least 11 developers. While the company has maintained its intention continue servicing its offshore bonds, large near term maturities in the onshore bond market has seen LGUANG’s bond price fall to stressed levels in recent weeks.   

Away from the property sector, bonds of distressed Chinese chipmaker Tsinghua Holdings (TSINGH) bonds were up almost +10 points following reports that 5 companies including Alibaba and several SOEs are bidding to be strategic investors in Tsinghua Unigroup given the group’s leading position in the domestic semiconductor sector. The company’s restructuring work team – which is led by the Beijing government and Tsinghua Holding officials would prefer to restructure its debt out of court but has yet reached a final decision. Unigroup’s previous deadline to submit a plan by 30 June was postponed to July and thus we will continue to monitor the situation for further developments. On the flip side an affiliate of Tsinghua Holdings, Tus-Park (THSCPA) announced it would be late in paying its June 2021 coupon. The management still expects to make the payment in the next few weeks although this bond fell sharply on the news.

In contrast to the weakness in China HY, other parts of Asia were significantly firmer last month, led by news of several bond tender offers by companies at a premium to market prices. Specifically, Indonesian homebuilder ASRIIJ saw its bonds jump over 6 points in June after the company launched a tender offer to purchase USD 20m of its due 2022 notes. Similarly, Indonesian palm-oil company TBLIJ saw its bonds rebound 10 points, following a tender offer to purchase USD 23m of its due-2023 notes while Indonesian tire maker GJTLIJ repurchased USD 152.21m of its due-2022 notes via a tender offer which was partly financed by new USD 175m 5NC2 senior secured bonds. Meanwhile in Hong Kong we also saw bond tenders from Lifestyle holdings (LIHHK) and PCPD Capital (PCPDC). The 2023 fund has exposure to all five of these names and although we did not participate in the tenders in order to maintain investment exposure to the issuers, we still benefitted from the secondary pricing upside. Our overall overweight in Indonesia, India and HK along with underweight exposure to both the Sri Lanka sovereign (-5.9% last month) and weak high beta property names, such as Evergrande, underpinned the 2023 portfolio outperformance vs the Asian HY market (as measured by the AHBI Index which fell -1.57% in June)

In terms of trading, activity slowed last month as weakness in the EUR limited liquidity upside from subscriptions. Nevertheless, we did add to several non-China property positions during the month including HK credits Sun Hung Kai Capital (SUNHKC), Emperor International (EMPINT) and LIHHK, Chinese industrial names China Water Affairs (CWAHK), Red Star Macalline (RSMACA) and Dr Peng (CHEDRP) and Gajah Tunggal (GJTLIJ) from Indonesia. We ended the month with an average portfolio yield of 8.9% and an average duration of approximately 1.2years. 

The information and material provided herein do not in any case represent advice, offer, sollicitation or recommendation to invest in specific investments. The information contained herein is issued by JK Capital Management Limited. To the best of its knowledge and belief, JK Capital Management Limited considers the information contained herein is accurate as at the date of publication. However, no warranty is given on the accuracy, adequacy or completeness of the information. Neither JK Capital Management Limited, nor its affiliates, directors and employees assumes any liabilities (including any third party liability) in respect of any errors or omissions on this report. Under no circumstances should this information or any part of it be copied, reproduced or redistributed. 

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