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May 2022

Fixed Income Monthly - May
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UOB Kay Hian Bond Radar

We have chosen to keep bond tenors short in our Bond Radar. Shorter tenor bonds (say 2-5 years) are less sensitive to interest rate movement than longer tenor bonds (5-10 years or longer). We are cautious about European bond issuers due to the Ukraine war. These considerations remain to be the key filtering factors for May.

The Ukraine war is now in its third month. Very few experts expected the war could have lasted so long. Now, a protracted multi-year conflict seems likely. Financial sanctions against Russia will become semi-permanent. Policies will be put in place to reduce dependency on Russia for oil, gas, and wheat. The bond market is less affected than the equity market and the commodities market. In June, we will include European bond issuers in our screening.

Chinese Property Bonds: High Yield and Distressed

We divide Chinese Property Developer bonds into 3 camps:

A) The strong State-Owned Enterprises like China Resources Land (291 HK), and China Overseas (688 HK). Our view is that there is little upside in bonds issued by this group.

B) The surviving developers who have managed to repay coupon and principal for recently matured bonds like Country Garden (2007 HK), CIFI (884 HK), Agile (3383 HK), and Times China (1233 HK). Bond prices are anywhere from 40 to 90 cents to a dollar, yielding 10-50%. Bond investors are definitely very doubtful and rightly so after so many issuers kept saying they had the money but could not repay at maturity.

C) The defaulted developers are the ones who already launched at least one Exchange Offer and/or have failed to repay a bond upon maturity. For example, Sunac (1918 HK, suspended), Shimao (813 HK, suspended), Guangzhou R&F (2777 HK), and Kaisa (1638 HK, suspended). These bonds are around 20 cents to a dollar. There are occasional distressed buyers. Most of these buyers are distress experts or they have insight into the issuer’s actual situation beyond its financial reports. Some of these bonds will be in a zombie state for easily 2 to 3 years. Some distress funds are accumulating at 20 cents to a dollar or less to become a significant holder of that particular issue to drive the restructuring process.