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  • Stay Away From Chinese Solar Sector

    Recent bankruptcy of Suntech Power and default on a loan by LDK, highlight a problem that goes beyond these two companies. The struggle of these companies to stay afloat indicate wide spread over supply in the Solar industry and steep decline in prices of solar products to the levels, where it is impossible for these firms to even recover their operating costs. LDK has not reported operating profit since second quarter of 2011. Suntech Power has not reported its financial statements since first quarter of 2012.

    Prices for poly silicon, which is used to manufacture wafers, have fallen from USD354 per kg in 2008 to around USD17 per kg driven by both improvements in manufacturing process as well as significant price competition in the sector. The margin in the sector for all the products has gone down significantly. Global capacity for poly silicon is around 300 thousand metric ton. But almost half of this capacity has a cost of production higher than the current average selling prices. Only a few large players with large production capacity and latest and efficient production processes are able to make some profit. LDK had to shut down its poly silicon manufacturing plant due to its inability to produce poly silicon at an economical rate. Cost of a mono 5 inch wafer has reduced from USD 2.2 per piece in 2010 to USD0.8 per piece in April 2013.

    Other countries have blamed Chinese firms of dumping solar products, supported by subsidies from the Chinese government. In May 2012, the Commerce department in the United States ruled that the Chinese firm are dumping their products in the United States in order to drive the competition out. The commerce department ordered to levy a 31% import tariff on silicon photovoltaic cells manufactured by the Chinese solar companies. The European Union is investing charges of dumping against the Chinese solar firms and it is being expected that an import tariff will be levied against the Chinese solar panel manufacturers.

    Suntech, world's largest solar panel maker, defaulted on its USD51 million offshore bond payment on 15 March 2013 and later its onshore subsidiaries were taken into bankruptcy by the local bank lenders. The company has around USD2.4 bn of debt outstanding. As of 26 April 2013, Sutech's defaulted bonds were trading at around 28 cent on the dollar. On 15 April 201, LDK defaulted on its USD23.8 million dollar denominated convertible bonds as it was unable to reach a settlement with holders of USD7.0 million worth of bonds. LDK's CNY denominated Dimsum bond are currently trading at around 36 cents on the dollar. Given the huge oversupply and weak pricing environment encompassing the Chinese solar sector portfolio mangers would do well to stay away from the sector.

    Jul 05 2:27 AM | Link | Comment!
  • Basics Of Leveraged Loan Market

    Leveraged loan is a syndicated loan, which is mainly issued by borrowers with high borrowing levels. There are two broad ways to differentiate between a leveraged and a conventional loan. They are credit ratings and loan's initial interest rate spread over LIBOR. Highly levered borrowers are generally sub investment grade companies and require paying higher spreads. Any loan which is rated BB and below is considered as a leveraged loan. Moreover, Bloomberg defines these loans as any loan with a spread of over 250 bps on the LIBOR.

    These loans are traded in secondary market and therefore are viewed as an alternate investment class to HY bonds. Except higher yields, there are several differences between these two asset classes. Leveraged loans are generally perceived as relatively less risky investment compared to high yield bonds. They are generally secured by the operating assets of the issuer, unlike high yield bonds. Therefore the former shows a better recovery rate. They also exhibit lower secondary market price volatility on a relative basis. They are floating rate securities while high yield bonds are typically fixed interest rate investments. This offers duration advantage to such loans. One more important benefit that these loans has over high yield bonds the former's very tight covenant package, which helps investor to apply more forceful control over borrowers.

    In a risk-on investment environment, most investors generally look at equities and risky bonds and move away from safe asset class like government bonds of the strongly rated sovereigns. That said, considering a very large size of this market, traditional junk bond investors should expand their scope of investments into leveraged loans.

    The higher allocation into this asset class has the potential to offer equity-like returns from secured floating rate securities, which are generally active in both primary as well as secondary market.

    It is a mature market in both the US and Europe. As per FT, in the past one year, US debt managers have raised more than USD50bn of new collateralized loan obligation vehicles to acquire senior secured leveraged loans issued by borrowers in the US and Europe. Given a significant yield compression of high yield bonds in recent years, this market offers some attractive high yield investment opportunities for fixed income investors and wealth managers.

    Over the past 12 months, European non-investment grade unsecured bonds have offered investors less than 6.0% yield. On the other hand, less accessible senior debt assets have provided investors with a yield of 4.75% over cost of funds.

    In summary, leveraged loan is an attractive asset class in a HY investment space owing to their seniority to high yields bonds and benefits including tangible asset cover, and better recovery rates.

    Jun 27 1:36 AM | Link | Comment!
  • Chinese Property Bond Markets Update

    The Asian bond markets saw lesser activity during the week from 13 May 2013 to 17 May 2013, compared to the previous week. The Chinese property bond market saw one new bond issuance from the sector. There was a dimsum bond issuance by Yanlord Land Group Ltd in the high yield space. Two companies availed offshore loan facilities. There were no rating actions in the China property sector. The monthly operating statistics were released by Agile Property, SPG Land and Central China Real Estate.

    Yanlord issued CNY 2.0 billion 5.375% coupon bearing dimsums maturing in 3 years at par. The final pricing of these junk bonds was tighter than the initial guidance of 5.5%. Citi, DBS Bank, HSBC and Standard Chartered were the sales managers. The bonds were issued by Yanlord Land (NYSE:HK) Company and were unconditionally guaranteed by Yanlord Land Group Ltd. The proceeds from the bond issuance will be used to finance existing and new projects. S&P has assigned BB- long-term issue rating to the issuance. Moody's has affirmed Yanlord's Ba3 corporate family rating and has upgraded Yanlord's senior unsecured debt rating to Ba3 from B1. The rating outlook on the company remains stable. Moody's has removed the notching related to subordination risk, to reflect Yanlord management's commitment to maintain the onshore secured borrowings/total assets ratio below 15%.

    Agile Property announced that it has signed a HKD 3,978mn three year term loan facility with a group of banks. China Resources Land, an investment grade credit and sovereign owned entity signed a HKD 800mn three year term loan facility with a bank.

    Agile acquired 10 adjacent commercial and residential sites with total area of 606,000 sqm in Tengchong County of Yunnan Province for CNY 160 million. Agile also acquired a site in Sanshui District, Foshan City for CNY 200 million.

    Agile achieved contract sales of about CNY 2.35 billion during Apr 2013, down 27% MoM. The contract sales during Jan-Apr 2013 stood at CNY 9.8 billion, which is about 23% of the company's annual sales target. SPG Land reported contract sales of CNY 377 million for Apr 2013, 109% higher compared to Mar 2013. The contract sales during the first four months of 2013 were CNY 1.2 billion, equivalent to approximately 29% of the company's 2013 sales target. Central China met 30% of its 2013 annual sales target, by generating CNY 3.8 billion of sales during Jan-Apr 2013. The contract sales during the month of April were CNY 649 million, down 36% sequentially.

    Given that the recent few weeks have seen supply in the high yield dimsum bond space, the high yield Asian credit markets may see some supply from the sector in the dimsum space in the forthcoming weeks. Fixed income investors should track the market for new investment opportunities that may come up.

    Jun 07 2:03 AM | Link | Comment!
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