Published December 6, 2008

Asian firms repurchase debt as bonds sink

They are in a better position to buy back debt as the region has not been hit as hard by the credit crisis

Email this article
Print article
Feedback

(Hong Kong)
CASH BENEFIT
Companies with cash to repurchase their bonds may avoid the need to refinance at a time when investors are avoiding all but the safest government securities

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 US$61.7 billion of debt since June, up from US$39.6 billion in the same period a year earlier, data compiled by Bloomberg shows.

The price of high-yield, high-risk Asian corporate dollar-denominated bonds plunged more than 45 per cent this year to 53.4 cents on the dollar, pushing yields to a record 28 percentage points above benchmark rates on Dec 1, 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 cancelling it guarantees them a windfall.'

Companies with cash to repurchase their bonds may avoid the need to refinance at a time when investors are avoiding all but the safest government securities.

About US$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 two billion yuan (S$442 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 per cent and 63 per cent of par.

'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 one per cent 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 US$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.'

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. 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 US$62.7 billion from hedge funds in October, according to Eurekahedge Pte, a Singapore-based research firm, shrinking assets under management by US$110 billion to US$1.65 trillion.

The seizure in credit markets may destroy as many as 700 hedge funds this year, according to Hedge Fund Research Inc.

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 US$972 billion in losses and writedowns taken by financial companies since the US mortgage market collapsed last year, 3 per cent 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 Allen & Overy LLP in Hong Kong. 'Not a lot of companies have toxic asset exposure.'

Olam, a Singapore- based farm commodity supplier, said on Thursday it will buy back as much as US$150 million of its convertible bonds as part of a 'commitment to the active management of its balance sheet'. Olam may spend S$114.8 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.

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 US and Europe.' -- Bloomberg