USD Bonds – Strategy Relative value search May 4, 2020 302

  • We scan the Asia corporate bond universe to discover bonds trading cheaper on a relative basis
  • USD corporate bonds are denominated in lot sizes of US$200,000

 

Tech Sector:

We find some Chinese tech sector names compelling, offering decent yields with healthy credit profiles. We like the prevailing low gearing and high interest coverage ratios, plus large cash positions reducing short-term liquidity risk.

 

LENOVO 5.375% Perpetual Corp (USD) [5.71% YTW]- Lenovo Group Ltd

The LENOVO 5.375% Perp (5.71% yield to worst) offers a very attractive 270bps senior-sub spread pick up (+2.70%) to its comparable senior LENOVO 3.875% ’22s (3.01% yield to maturity) with both bonds having call date and maturity date respectively on the same day. The perpetual bond comes with a 300bps step up on its call date 16 March 2022.

 

HUAWEI 4% 21 February 2027 Corp (USD) [3.38% YTM] – Huawei Investment Holdings

We find the HUAWEI curve trading at interesting spreads to comparable A-rated tech peers such as Tencent (c.-100bps spread) and Alibaba Group (c.-150bps spread). Notwithstanding its unlisted and unrated status, its credit profile stands close to its tech giant peers, with ample liquidity of 0.83x cash/ST debt and 13x interest coverage. Moreover, we view its dominant status in the Chinese tech space and strong ties to national interest as credit positives. We find the HUAWEI 4% ’27s (3.38% yield to maturity) trading slightly more attractively in the HUAWEI curve.

 

TENCNT 3.28% 11 April 2024 Corp (USD) [1.73% YTW] – Tencent Holdings Ltd

And in the A-rated tech space, we see value in the TENCNT 3.28% ’24s (1.73% yield to worst) along the TENCNT curve, sacrificing only 6bps spread to the TENCNT 3.575% ’26s (1.88% yield to worst), which is callable 702 days later. Note that the TENCNT 3.28% ’24s is callable on 11 March 2024 (1 month prior to maturity) at par and comes with a make whole call provision with T+15bps discount rate, protecting the present value of bondholders’ future coupons if called early.

 

 

 

Fosun International Ltd

Amidst a low interest rate environment, holding FOSUNI bonds will offer bond investors attractive returns if called. Fosun International Ltd is a Chinese international conglomerate listed on the HKEX (00656.HK) since 2007 with a current market cap of US$10.7bn. The group operates in nine segments; insurance, investment, wealth management, internet finance, health, happiness (retail, tourism and entertainment), steel, property development and sales, and resources (metal and oil & gas).

FOSUNI bonds are senior bonds with both call dates and maturity dates. They will mature at maturity date, however, at Fosun’s discretion, are callable at an earlier date. The current low rate environment could increase the probability Fosun calling in order to lower borrowing rates. With FOSUNI bonds trading under par and call prices above par, we see interesting ideas in the FOSUNI curve.

 

FOSUNI 5.25% 23 March 2022 Corp (USD) [6.94% YTW]

The FOSUNI 5.25% ’22s is callable at 102.625 from now to 23 March 2021 and then at 101.3125 thereafter to its maturity date. At an ask price of 97.05, this translates to a return of 5.74% (48bps yield pick up to the FOSUNI 5.375% ’20s maturing 216 days later) if called today, and a yield to maturity of 6.94%.

 

FOSUNI 5.95% 29 January 2023 (USD) [7.36% YTW]

Similarly, the FOSUNI 5.95% ’23s is callable at 102.975 after 29 January 2021 and then at 101.448 after 29 January 2022 to maturity. Trading under par at 96.55 translates to a yield to call of 15.04% (896bps spread pick up to the FOSUNI 6.875% ’21s maturing 2 days later) if called on the first call date 29 January 2021, and a yield to worst of 7.36%.

 

 

Note that no abnormal returns will be had if the bonds are not called, as shown by Figure 4, as the FOSUNI curve trades normally to maturity.

 

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Profile photo of Timothy Ang

Timothy Ang
Research Analyst
Phillip Securities Research

Timothy covers credit analysis of local and foreign bonds. Previously an equity dealer, he handled equity trade execution and portfolio management. He has presented seminars for organisations such as SIAS, SPH and IRAS, commentated live market updates for 93.8FM, and authored investment articles for the Business Times newspaper. He graduated with a Bachelor of Commerce in Accounting & Finance from the University of Western Australia.

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