Bottom-up research pays off when it comes to assessing distressed debt

In China's expanding apartment market, Sandra Chow and Cheong Yin Chin have figured out one way to tell whether properties are occupied: drive by and see if people are actually hanging their laundry outside.

Such on-the-ground research helped the two-woman Asian high-yield and distressed debt team at CreditSights decide to upgrade US$3.35 billion of developer Country Garden Holdings' dollar-denominated bonds on March 24, believing the sell-off triggered by the collapse earlier that month of Zhejiang Xingrun Real Estate was too extreme. Since then, Country Garden's debt has rallied as much as 9.1 per cent.

Getting it right when it comes to the region's riskiest borrowers has never been more important. Asia's corporate junk bond market has grown to US$87.2 billion as of the end of last year from US$15.2 billion in 2008, data from Schroder Investment Management showed. Borrowers in China are selling record amounts of notes and some are starting to miss payments. Indonesia's Bakrie group is seeking to avert a third default in 17 months while Australia's Qantas Airways lost its investment-grade rating.

"The hunger for yield means bottom-up research is even more important for money managers so they can discern good credit from bad," said Cheong, who joined CreditSights in December 2012.

Junk-rated notes in Asia returned 5.8 per cent in the first half, according to Bank of America Merrill Lynch indices. Within that, BB1 to B3-rated credits returned 2.3 per cent to 8.9 per cent while those deemed distressed at CC to C fell as much as 20 per cent. BB1 in the US bank's composite grading is equivalent to Ba1 at Moody's Investors Service and BB-plus at Standard & Poor's.

Asian borrowers including China Forestry Holdings, Bakrie Telecom, Suntech Power Holdings and Suzlon Energy have defaulted on at least US$2 billion of US dollar bonds over the past three years. That puts a premium on local knowledge, good access to management and a dose of scepticism, Chow said.

Since overtaking Japan as the world's second-largest economy in 2010, China has helped fuel a bond-market boom. Of the US$116.7 billion of dollar bonds sold in Asia excluding Japan since the end of December, US$63.7 billion have been from companies in Hong Kong and China. Chinese corporate debt surpassed that of the US for the first time in 2013, S&P said on June 15.