Dec. 5 (Bloomberg) — Asian companies are stepping up the pace of debt repurchases as prices fall to record lows.
Galaxy Entertainment Group Ltd., Olam International Ltd. and Flextronics International Ltd. lead borrowers that bought back $61.7 billion of debt since June, up from $39.6 billion in the same period a year earlier, data compiled by Bloomberg show. The price of high-yield, high-risk Asian corporate dollar-denominated bonds plunged more than 45 percent this year to 52.9 cents on the dollar, pushing yields to a record 28.1 percentage points above benchmark rates yesterday, Merrill Lynch & Co. indexes show.
“For many issuers with distressed bond prices, buying back their securities will be one of the easiest investment decisions they’ll ever make,” said Damien Wood, head of Asian credit research at Credit Suisse Group AG in Singapore. “Buying back debt at a discount to par value and canceling it guarantees them a windfall.”
Companies with cash to repurchase their bonds may avoid the need to refinance at a time when investors are shunning all but the safest government securities. About $368 billion of Asia- Pacific corporate bonds rated by Standard & Poor’s are scheduled to come due between the fourth quarter of this year and 2011, the New York-based credit assessment company said on Dec. 2.
China High Speed Transmission Equipment Group Co., the nation’s largest maker of gears for wind turbines, said on Oct. 30 it would buy back as much as 2 billion yuan ($291 million) of zero coupon bonds due 2011. It told Hong Kong’s stock exchange on Dec. 3 that it acquired bonds with a face value of 427 million yuan for between 62 percent and 63 percent of par.
‘Best Interests’
“It’s in the best interests of the company and the shareholders to repurchase the bonds under such conditions,” Chairman Hu Yueming said in an interview.
Singapore-based electronics maker Flextronics offered on Dec. 2 to pay bondholders between 78 cents and 87 cents on the dollar for half its outstanding 1 percent convertible notes due 2010. Galaxy, the Macau casino operator controlled by billionaire Lui Che-woo, said it will pay 53 cents on the dollar for its $250 million of floating-rate notes maturing in 2010 after the price of the securities fell from 100 cents in May.
“The bonds were out there in the market and we are in a position to say we’d like to take them off investors’ hands,” said Peter Caveny, Galaxy’s principal of investor relations. “We have the cash.”
‘Ridiculously Low Prices’
As recently as June, corporate dollar-denominated bonds in Asia rated below investment grade were trading for an average of about 90 cents on the dollar to yield 7.45 percentage points more than benchmark rates, according to Merrill data. Junk bonds in the U.S. fell an average 40 percent in the past year to 56 cents on the dollar, while European speculative grade debt slumped 46 percent to 50 cents on the dollar, according to Merrill.
Speculative grade, or junk, bonds are rated below Baa3 by Moody’s Investors Service and BBB- at S&P.
Much of the decline in bond prices stems from forced selling by money-losing hedge funds that need to repay investors, resulting in “really ridiculously low prices” for corporate debt, said Sean Darby, head of regional strategy at Nomura Holdings Inc. in Hong Kong.
Investors withdrew a net $62.7 billion from hedge funds in October, according to Eurekahedge Pte, a Singapore-based research firm, shrinking assets under management by $110 billion to $1.65 trillion. The seizure in credit markets may destroy as many as 700 hedge funds this year, according to Hedge Fund Research Inc.
‘Difficult Lessons’
Asian companies may be in a better position to buy back debt than borrowers in other parts of the world because the region hasn’t been hit as hard by the seizure.
Of $972 billion in losses and writedowns taken by financial companies since the U.S. mortgage market collapsed last year, 3 percent were in Asia, Bloomberg data show. The emerging markets of Asia, Brazil and Russia will account for all global economic growth in 2009, the International Monetary Fund in Washington forecast last month.
“The balance sheet management instilled after the 1997 financial crisis in Asia meant that companies learned very difficult lessons and worked to maintain strong balance sheets,” said James Grandolfo, international capital markets partner at law firm Allen & Overy LLP in Hong Kong. “Not a lot of companies have toxic asset exposure.”
Olam, a Singapore-based farm commodity supplier, said yesterday it will buy back as much as $150 million of its convertible bonds as part of a “commitment to the active management of its balance sheet.”
Refinancing Risk
Olam may spend S$114.8 million ($75 million) to purchase its debt at 50 cents on the dollar, Ben Santoso, an analyst at DBSVickers Securities Singapore, wrote in a research note to clients. Olam may book gains of S$114.8 million, he said.
Olam jumped 11 percent to 97.5 Singapore cents, making it the best performer in the Asian city’s Straits Times Index. The convertible bonds surged 30 percent to 59.88 cents on the dollar and their yield narrowed by 6.47 percentage points.
Still, bondholders may refuse to sell for 60 cents or less because they can earn more by holding on to the notes and making $111 per $100 face amount if redeemed under a put option in 2011, said Huy Hoang, a fund manager at HDH Capital Management Pte., which owns $2 million of the paper and wants at least 79 cents on the dollar to sell. “We’re getting calls from banks all the time asking if we want to sell, and we’ve said ‘No.’”
For those with outstanding debt that they can’t or won’t cancel, refinancing risk is becoming a “growing concern” in the Asia-Pacific region, S&P said in its Dec. 2 report. Financing options for companies with “weaker fundamentals” have diminished “considerably,” said Diane Vazza, head of S&P’s global fixed income research group in New York.
For those that can, now is “a good opportunity to buy back debt, the spreads are so attractive,” according to Kazuaki Oh’e, a debt salesman in Tokyo at CIBC World Markets Japan Inc., part of the investment unit at Canada’s fifth-biggest bank. “The centre of the problem is in the U.S. and Europe.”
