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Asia distressed-debt drought keeps focus on Noble, Reliance

[SINGAPORE] Asia's booming bond market is leaving distressed-debt investors with few options to bet on for the new year.

As Asia's bond sales surpass US$300 billion, the region's junk bond yields have slipped below its five-year average this year, keeping some of the lowest-rated stressed issuers afloat. Hedge funds dedicated to distressed strategies for 2018 will likely focus on the big names such as Noble Group Ltd and Reliance Communications Ltd, which are seeking to restructure more than US$8 billion of debt combined, investors said.

"Normalised commodity markets as well as strong primary issuance markets in Asia have helped some of the weaker credits term out their debt," said Ani Deshmukh, a Hong Kong-based portfolio manager at Nexus Investment Advisors Ltd.

"Apart from a few remaining large-cap situations like Noble, we expect fewer opportunities in 2018 in Asia's G3 bond market barring a material risk-off."

Global hedge funds dedicated to distressed strategies have gained about 5 per cent this year through October, according to industry researcher Eurekahedge, falling off the pace in 2016. Within Asian junk bonds, notes graded in the lower half of the range have risen two times more than their stronger peers this year, according to a Bank of America Merrill Lynch index.

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High-yield default rates in Asia are expected to end at 2.3 per cent in 2017, up from one per cent in 2016, before moderating to 1.1 per cent next year, according to a December report by JPMorgan Chase & Co.

Investors agreed to debt swaps offered by Mongolian Mining Corp and PT Bumi Resources as coal prices recovered, while PT Indika Energy, Vedanta Resources plc managed to sell new bonds. Tyremaker PT Gajah Tunggal and Anton Oilfield Services Group have also refinanced while Global A&T Electronics Ltd and China Fishery Group Ltd are close to finishing their debt reorganisations.

"The next big event will be Noble Group, which is going to get restructured," said Alex Turnbull, Singapore-based managing partner at Keshik Capital Pte. "Plus, there's an epic and protracted bank loan cleanup in India, which will run for years."

Noble Group, the embattled Hong Kong-based commodity trader, started engaging creditors in November to reorganise US$3.5 billion of debt in the newest chapter of its three-year survival battle.

At Reliance Communications, a collapse in its asset-sale programme has pushed the Indian telecommunications firm into a default, another blemish in the banking system wracked by US$207 billion of bad loans.

The supply of stressed loans in India will increase, offering interesting opportunities for investors as the bankruptcy court process picks up steam, Mr Deshmukh said. Last month, China Development Bank asked a local tribunal to place Reliance Communications under insolvency proceedings to recover its loan, according to a person familiar with the matter.

Keshik Capital sees ominous signs in weaker retail spending in Australia that has afflicted department-store operators such as Myer Holdings Ltd, while OrotonGroup Ltd slipped into administration. The growth in online lending platforms in China and a crackdown on Ponzi schemes by regulators could add to credit-market stress.

"We will probably see some retail blowups in Australia and some dead P2P lenders in China," Keshik Capital's Mr Turnbull said.


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