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Viewpoints and latest developments

China Distressed Debt Yielding Juicy Returns


Bets on beaten-down Chinese distressed bonds could pay off if the nation persists with its credit easing and there’s a sustained rally in the domestic stock market, according to an Asia-based hedge fund that manages $3.5 billion.

Distressed dollar bonds from Chinese issuers have had their best start to a year since 2012. A strategy that includes investing in these notes “could generate out-sized returns” if an improving economy and share gains help investors recover more money from troubled debt, said Kevin Wu, a portfolio manager at Pinpoint Asset Management.

Wu is one of the managers of the Pinpoint Multi-Strategy Fund, an offshore hedge fund which has posted an annualized return of 11.3 percent since June 2014. Pinpoint Asset, which has been involved in high-profile Asia restructurings including that of troubled commodities trader Noble Group Ltd., also runs three onshore hedge funds.

It’s not a sure bet though. China’s economy weakened further as industrial output had the slowest start to the year since 2009. Investors have yet to see clear signs of growth bottoming-out in the near-term, and any truce in the U.S.-China trade war could lead to the Asian nation “re-igniting” its deleveraging campaign, Wu said.

China’s world-beating stock rally this year is also seeing strains with one of the worst routs in years catching traders off guard on Friday.

‘Deleveraging Is Dead’: China Signals Renewed Focus on Growth

Chinese distressed bonds have returned 10.6 percent this year, the most since the similar period in 2012, according to an ICE BofAML index. For all of 2018, returns were just 1.6 percent.

The nation has been rolling out measures aimed at spurring lending, especially to smaller businesses, with credit growth showing tentative signs of picking up. So far, there has been no relief for the riskiest borrowers in the world’s second-largest economy. Chinese corporations reneged on 14.7 billion yuan ($2.2 billion) of local bonds in the first two months, a record for the period.

Chinese corporate bonds worth $31.5 billion face repayment pressure

Default rates are likely to remain elevated in 2019 and driven by non-property borrowers, said Wu, who declined to comment on specific companies that the firm is involved in.

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