The fund closed November at +17.6% on a YTD basis, against an index return of +16.5%, thereby outperforming the index by 110bps over the period. The fund has been particularly resilient through November, registering a positive return of 28bps while the index was -12bps over the same period. Much of this outperformance came as we have avoided China Property names with binary risk such as Vanke, Sunac, and Roadking.
The main event for November was the US presidential election, which resulted in a victory for Donald Trump, as well as Republican control of the House of Representatives and the Senate. That backdrop saw US risk assets do very well, with the S&P 500 up +5.9% over the month in total return terms. Their performance was supported by ongoing strength in US economic data such as ISM and initial jobless claims numbers. This backdrop lends itself well to High Yield assets continuing to outperform.
Over the course of the month, we have seen several positive developments materialise within our portfolios:
1) Sri Lanka sovereign launched their consent and exchange for their existing bonds towards the end of November (defaulted in 2022). We have acquired bonds this year at an aggressive pace at lower levels, as we have been anticipating this sovereign bond restructuring along with IMF’s support. The terms are largely similar to what was disclosed earlier. The restructuring is currently in final stages, and we see a high likelihood of the deal passing this month as the ad-hoc committee (creditor group) represents >50% of the bonds and it has already signalled its support for the bond restructuring package. Once the consent and exchange passes this month, we will have new restructured bonds in the new year – consisting of three types of bonds namely: (i) Past Due Interest (“PDI”) bond which will follow an accelerated repayment timeline and hence will be the strongest new bond, (ii) a governance linked bond and (iii) four macro-linked bonds. We are quite positive on the value generation from the macro-linked bonds which have upside potential if Sri Lanka’s GDP between 2024-2027 is strong. Sri Lanka’s GDP growth has been strong at 4.5-5% (real) so far and its FX has appreciated well this year, leaving upside potential on the macro-linked bonds. We are currently supporting the bond exchange, and believe these bonds can return double digit returns during 2025.
2) Vedanta launched another debt-neutral deal with 3-year (2028s) and 7-year (2031s) bonds in order to call their old 13.875% 2028 bonds. The 3-year priced at 10.25% yield and the 7 year at 11.25% yield, which are quite attractive levels for a fundamentally deleveraging credit that is now successfully extending its maturity profile. They have also launched a concurrent consent offer for the remaining stub of the old 2024 bonds asking for a few restrictive covenants to be removed. This is a win-win for the company and the holders, which will enable a ratings upgrade from S&P for the company, thereby removing the “CCC” overhang for the complex. With these developments, bonds have rallied to around and below 10% across the curve, and we expect this to continue to be an alpha position for us into 2025.
3) We added three new issues, namely Fosun (Chinese conglomerate with global assets such as Club Med), Nigeria sovereign, and Rakuten’s new subordinated perps. All have done extremely well, and are up between 0.5-2pts above re-offer since new issue. They have since contributed positively to the fund’s performance
Against these strong new issues, we have sold existing tight paper such as Japan’s Rakuten 2027s and India’s Continuum Green’s renewable green bonds (COGREN 2027s) at yields of 6.5-7% to make space for these strong outperformers at higher yields.
The portfolio remains well anchored with a YTW of 9.2% with 89 issues and 60 credits. We continue to maintain a small duration overweight (2.9 years) versus the benchmark at 2.2 years and expect outperformance from a total return and relative perspective given attractive carry and spread compression potential. We firmly believe that the outlook for high yield around the short to intermediate duration will lead performance across asset classes in 2025.
Thank you for your continued support.
NIVEDITA SUNIL
On behalf of LOIM Asia Fixed Income team