Article content

(Bloomberg) — US market turmoil triggered by tariffs and a slowing economic outlook is boosting the appeal of Chinese corporate debt that less than six months ago was considered uninvestable by some credit managers.

Article content

Article content

“There’s been a lot more focus on China,” Winnie Cisar, global head of strategy at CreditSights, said on the Credit Edge podcast this week. “The US seems to be sneezing an awful lot lately and the rest of the world is saying: Well how do we mask up and try to defend ourselves against this?”  

Article content

US high-yield credit markets led the world in performance in the month after Donald Trump’s November presidential election victory, which fueled high hopes of economic stimulus and deregulation. Trade war fears have since fractured market complacency, turning that debt into a laggard. Meanwhile, Chinese credit is rebounding, following on from a surge in equities that was driven by fiscal and monetary stimulus.

“Investors may be starting to look back at China,” said Omotunde Lawal, head of emerging markets corporate debt at Baring Investment Services. It’s still a “little bit cheap” even though spreads have a rallied a bit given the “renewed government focus on technology, a 5% growth target and the benefits that the AI advances can bring to Chinese industrials and consumer companies.”

Click here to hear CreditSights’ Cisar discuss global portfolio allocations

Chinese corporates are taking advantage of the window of interest, raising $15 billion so far this year in the dollar bond market, the most for the period since 2022. Even real estate firms are showing signs of life. Beijing Capital Group is considering raising as much as $500 million in debt, just weeks after tapping hungry dollar debt investors for $450 million.

Article content

Article content

Cisar notes growing investor interest in Chinese technology firms. Search engine Baidu Inc. this month sold 10 billion yuan-denominated bonds outside of the mainland — its first debt issuance since 2021. A $2 billion exchangeable bond swiftly followed and was several times oversubscribed. 

To be sure, property is still seen as a risk. And Asia’s largest economy remains highly exposed to any escalation in the trade wars and would ultimately be hit by any US economic downturn.   

“It is notable that the only US tariffs that have not been delayed or alleviated are those imposed on China on Feb. 4 and March 4,” said Paul Mackel, global head of FX research at HSBC Holdings Plc. “It is likely that more tariffs or other actions could be announced after the US administration finishes its various reviews on China’s trade. Tariff-induced depreciation pressure on the renminbi is, therefore, still very high.”

Xuchen Zhang, an emerging markets credit analyst at Jupiter Asset Management, is cautious about market complacency for China debt given some issuers “have been trading down to single digit yield without a clear and sustainable path to address maturities.”

Article content

In addition, American corporate debt markets are so much larger than others that large money managers are naturally forced to buy. But fund flows track performance and rising US policy uncertainty incentivizes investors to park more of their cash elsewhere. 

And “the seemingly good return in 2024 and this year to date from China high-yield credit is a function of policy turnaround, survivor bias and horizon bias,” Zhang said. “We are left with a far higher quality and smaller investment universe which supports overall price recovery from both fundamental and technical perspective.”

Week In Review

• Stephen Moore, an informal economic adviser to President Donald Trump, floated eliminating the federal tax subsidy for municipal bonds, a step that would flood the taxable credit market with additional debt, and boost borrowing costs for cities and states.
• Companies in both Europe and the US are shelving plans to tap the riskiest corner of the loan market after US President Donald Trump’s trade wars triggered economic uncertainty. UK production company All3Media and French insurance broker April Group this month withdrew proposals to reprice existing leveraged loans in Europe, according to people familiar with the matter. Crop-protection company Rovensa pulled a planned €1.1 billion ($1.2 billion) loan refinancing and extension.
  • That said, the leveraged loan market is still open for many borrowers. A group of banks led by JPMorgan Chase & Co. kicked off a $7.4 billion bond and loan offering for Bausch Health Cos. as the pharmaceutical company seeks to refinance debt.
  • Banks including Goldman Sachs and Citigroup launched a €7.45 billion ($8.1 billion) debt sale to finance Clayton Dubilier & Rice’s purchase of a stake in Sanofi SA’s consumer health division.
  • A group of lenders has led by Royal Bank of Canada relaunched a leveraged-loan offering to support the buyout of Berkeley Research Group days after the deal was delayed after the consulting firm suffered a cyberattack.
• Private credit funds are grinding down margins and cranking up leverage to win business over their liquid peers, as trade wars and geopolitical uncertainty suppress corporate deals.
• A Deutsche Bank AG Additional Tier 1 bond surged to the highest in three years after the lender decided against redeeming the debt, choosing instead to let the coupon nearly double.
• Forever 21’s US retail operator filed for bankruptcy after being hit by rising inflation and intense competition in the fast-fashion sector, the second time the brand has entered Chapter 11.
• A small group of pioneers is hoping that factor investing, which has grown into a multi trillion-dollar market in equities, can become the next big thing in the world of corporate bonds — particularly with Donald Trump’s agenda sending shock waves across assets.
• Wall Street brokers have started selling insurers’ claims tied to Los Angeles’ deadly wildfires, which may trigger a payout from the utilities blamed for the destruction, according to people familiar with the matter.
• Some lenders to WW International Inc. have entered into confidential talks with the diet company as it tries to cut interest expenses while revenue declines persist, according to people familiar with the situation.
• Brightspeed, a telecommunications firm owned by Apollo Global Management Inc., plans to seek additional funding from investors to expand its fiber optic network, according to people familiar with the matter, months after the company restructured its debt load with a group of banks.
• Appeal judges approved emergency funding allowing Thames Water to access as much as £3 billion ($3.9 billion) and stave off temporary nationalization.
• Creditors owed around $150 billion by defaulted Chinese developers always stood to get just pennies back, but many are finding that even after a debt plan is agreed it’s not necessarily a done deal.
• A group of banks led by JPMorgan Chase kicked off a $7.4 billion bond and loan offering Wednesday for Bausch Health Cos. as the pharmaceutical company seeks to refinance debt.
• A bankruptcy judge gave Forever 21 temporary permission to start going-out-of-business sales at all 354 US stores while managers try to find a last-second rescuer for part of the 41-year-old clothing chain.

Article content

On the Move

• JPMorgan Chase & Co. hired UBS Group AG managing director Jens Becker as the bank continues to build its mergers and acquisitions efforts
• Iconicchain, a fintech firm that helps banks to manage significant risk transfer transactions, is hiring Steven Gandy, Banco Santander SA’s former head of private debt mobilization to steer its planned expansion into the US market.
• UBS has appointed Ryan Dawson as EMEA co-head of leveraged finance origination, alongside Oliver Gaunt, according to an internal memo seen by Bloomberg.
• Managing directors Lisa Byrnes and Matthew Kratter have left Canaccord Genuity Group Inc. Both were dealmakers in the technology, media, marketing and information services banking team.
• Saybrook Fund Advisors, an investor in distressed and defaulted municipal debt, has hired industry veteran Bill Black to co-manage a key strategy as the firm expands into high-yield muni separately managed accounts.
• National Bank of Canada has hired Simon Meagher as director of fixed income institutional sales to replace Alain Lamarre, managing director of fixed income, who is retiring.

—With assistance from Rheaa Rao.

Article content