Why bond buybacks across Asia-Pacific should be on your radar

You’d be hard-pressed to find an Australian investor unaware of the power of a share buyback, particularly in the current reporting season. The concept of bond buybacks? Far from front of mind – yet this area of the market has the potential to be lucrative.

For the uninitiated, bond buybacks refer to companies buying back their own bonds – and with the market the cheapest it had ever been only 18 months back, it was a popular strategy across Asia, particularly India, South East Asia and China, while Japan and Australia got into the action too.

Some examples include Adani Ports and Special Economic Zone’s buyback of up to $130m of senior debt last year or New World Development’s $610.3m buyback of its dollar bonds in December 2023.

It’s a key focus area for John Stover, portfolio manager for the Tribeca Asian Credit Fund, for the coming year, viewing it as potentially a major source for outperformance.

“What we’ve been focused on over the past 12-18 months is getting in front of some of those buybacks, because those buybacks can move the market price of the bond up by 5,10,15 points, and we’ve seen that across the region,” says Stover.

In this episode of The Pitch, Stover discusses how to profit from event-driven and special situations across Asia – with an eye to the value of bond buybacks.

EDITED TRANSCRIPT

What are event-driven and special situations in the context of Asian credit?

Stover: If you look at the past 12 months, the special situations opportunities and event-driven catalyst opportunities we’ve focused on are companies buying back their own bonds.

If you look back about 18 months ago, the market was the cheapest it’s been in Asia. The yield on the Asia high-yield index got to about 22% - which is actually higher than it was in the GFC. Investment grade bonds were also very dislocated at that point in time.

Companies have seen how cheap their bonds are and have been using either free cash flow or bank finance secured by their assets to buy back their cheap bonds. What we’ve been focused on over the past 12-18 months is getting in front of some of those buybacks because those buybacks can move the market bond price up by 5, 10, 15 points. We’re seeing that across the region. This has been happening in India, Southeast Asia, China and even to some degree in Australia and Japan.

There have been a lot of examples over the past year where we’ve been able to dig into the balance sheet, understand the assets the company have that are unencumbered and they can get finance on, and try to understand the attitudes of management around this and what the refinancing plans are.

Are there any sectors that you are favouring at the moment?

Stover: It’s been across sectors and across countries. We’ve seen some large buybacks in the Indian renewables space. We’ve seen some in Indonesian property and also in the natural resources space. We’ve even seen some in Macau and in the Chinese tech and industrial spaces. We’ve had exposure to each of these countries and sectors that have been positive drivers for us in terms of performance.

You are tipping this to be a source of outperformance in 2024. Why is that?

Stover: The yield on our portfolio is 10-11% at the moment. In addition to the yield, you can have these kickers in the portfolio, which are the event-driven and catalyst opportunities. At any given month, that can add 1-2% of returns. Given where yields have gone, we think there’s a lot of carry in the portfolio and you’re going to get a lot of positive performance just based on the yield. But then, with these catalysts that can move the market price of the bond by 10-15 points, those positions can give us kickers in the portfolio that we can produce low to mid-teens returns out on a one-year basis.

Can you take us through an example of how you’ve invested in this space?

Stover: One that is very topical at the moment is a company called Lippo Karawaci Tbk Pt (IDX: LPKR). Those bonds traded down significantly, to 60-70 cents on the dollar a couple of years ago because of what was happening in the market. What was happening in China impacted the sentiment in the market in 2022. That’s really decoupled from what we’re seeing outside of China in 2023. But we bought the bonds.

The thesis was the company had a large degree of unencumbered assets that they could use to get secured finance. They own the largest hospital business in the country. They were also one of the largest real estate developers. The hospital business had no debt on it. We bought the bonds for 60-70 cents in the dollar. They did a tender offer for the bonds that was funded by a bank loan in early 2023 and we think they’re going to be able to get another bank loan using the hospital business to buy back their own bonds. Those bonds have actually moved up to about 95 cents of the dollar now and we think there’s still some upside there.

Learn more

The Tribeca Asia Credit strategy uses a long short approach to extract high-quality returns from the Asia Pacific corporate bond market. For further information, please visit their website.