The Asia credit market began April on a positive note, but midway through the month all eyes shifted to the situation at China Huarong, one of the “big four” Chinese bad-debt managers. Being one of the largest Chinese issuers of USD bonds, the swift downturn in Huarong’s bond prices dragged down the rest of the market (more on that below). However, like in many other dislocations, the market eventually digested the moves and rebounded towards the end the month to finish in positive territory. The Fund performed solidly during the month with a gross return of +1.37%. During the month, the yield on the Asia High Yield index moved from 7.09% to 6.80% and the spread over treasuries moved from 652bps to 624bps. Portfolio & Outlook The Huarong situation began with a delay in the company’s audited 2020 results and deepened further on reports and speculation of a potential restructuring and/or recapitalization. An information vacuum and lack of swift government support exacerbated investor fears and bonds that had been trading above par to start the month, fell to ~60 cents on the dollar in the space of one day. Positive comments from regulators and the company continuing to perform on its debt led to a bounce back that saw the mid to long end of the curve settle at current levels in the mid to high 70s. There is no doubt that China is in a different part of its credit cycle relative to the US and Europe, having started tightening policy at a time when the rest of the world continues to hold extremely loose monetary and fiscal policy. Beyond that, policy makers in China are very much focused on cleaning up vulnerabilities in the financial system and taking a more market-oriented approach to defaults. As we commented in our March letter, we think there may be continued idiosyncratic events in China, but these create very attractive opportunities in the market. We used the Huarong selloff to add to positions in companies we like fundamentally whose bonds fell several points in sympathy, such as Sunac, The Huarong situation and its impact on the Asian market underscores the current disparity between the Asia credit market and the market in the US and Europe. The Asia High Yield Index spread is now 2.1x that of the US High Yield Index, the highest differential ever. That differential is not a reflection of higher-rated credits making up a larger portion of the US Index. Asia BB bonds have a 1.8x higher spread than their US counterparts and B-rated bonds have 2.2x higher spread. The difference in the tone of news articles on each market are telling.
To read more click download the factsheet: Tribeca-Vanda-Asia-Credit-Fund-Monthly-Update-April-2021