The fund closed November at +13.43% on a YTD basis (USD N Accum share class) vs the JACI benchmark return of +6.57% for the same period. In comparison, US Investment Grade Corporates and US Treasuries returned +4.14% and +2.15% respectively for the same period. At the time of writing (11th Dec 2024), the fund returned +14.21% YTD (same share class).
Over the course of the month, we have seen several positive developments materialise within our portfolios amongst a few HY names.
Firstly, 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 2025 – 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 in 2025.
Secondly, 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. We have exited all our Vedanta 2026s and partially some 2029s, to purchase the new 2031s which have a later call date (earliest the 2031s can be called is Dec 2027, which is good for us as we have locked in the coupons for 3 years at the minimum).
Lastly, we added three new HY issues (existing credits in the fund), namely Fosun (Chinese conglomerate with global assets such as Club Med), Nigeria sovereign, and Japan’s Rakuten via its new subordinated perps. All have done extremely well, and are up between 0.5-2pts above re-offer since the issuances. They have since contributed positively to the fund’s performance. We also added to a new issuance in Trade Development Bank of Mongolia (TDBM) at 9% yield for 2027 maturity.
We trimmed and took profit on more seasoned HY positions (in partial sizes) including Indian financial lender Manappuram Finance 7.375% 2028s at 7.0% yield, and Rakuten 2029 which has risen to 110c cash price from our purchase price of par.
Within IG, we reduced our duration by trimming long-duration paper for 8-10Y and 30Y bonds which have witnessed spread compression lately. This includes trimming Nanshan Life Insurance T2 2034 at around ~130 bps, Freeport Indonesia 2052s at 150-155 bps, and Thai Oil 30Y at ~160 bps. Earlier in Oct and in early Nov, we had added to various short-dated papers (up to 5 years) such as 1% fund weight in Meituan 2029, New World Services 2028 (to be renamed Chow Tai Fook Services), leading Chinese auto-distributor Zhongsheng 2028, South Korea’s Hynix 2028 / 2029, as well as parked some capital in QBE Insurance AT1 which will be likely called next year. We had also added to Thailand’s Muangthai Life Tier II callable in 2026. All of these actions have led to a further duration reduction of the fund to 5.2 years whilst we have maintained the yield of the fund.
As we near the close of the year, we expect one final rate cut of 25 bps by the Fed for 2024 (FOMC meeting on 18th Dec). If so, this would result in a total of 100 bps of rate cuts this year from 5.375% median to 4.375% median rate. We expect this to continue to aid our portfolio, especially the shorter and mid-dated segments of higher yielding positions.
At the time of writing, the portfolio has a yield-to-worst of 7.25% (USD terms), Z-spread of 340 bps, and duration of 5.2 years.
In terms of market outlook, we will be releasing our annual Asia 2025 outlook in Jan and hosting a webinar for clients on 22nd Jan (details to be provided). We look forward to engaging with you then, and meanwhile we wish one and all a Merry Christmas and a very festive year end.
We appreciate your support for 2024, and please do not hesitate to reach us with your queries and feedback.
DHIRAJ BAJAJ
On behalf of LOIM Asia Fixed Income team