Algebris eyes opportunities in Japan, hybrid bonds
Algebris Investments, the UK-based hedge fund manager overseeing $1.3 billion in AUM, sees opportunities in Japan in the near term, and in Asia issuance of contingent convertible bonds in the longer run.
The firm has raised its Asian equity exposure to have a greater weighting in Japan, says Algebris chief investment officer Ivan Vatchkov, given the launch of stimulus measures that will inject $1.4 trillion into the local economy.
“It’s one of the largest and most liquid markets globally,” says Vatchkov. “It’s performing, attracting inflows and will have significant repercussions for the rest of the region.”
Of Algerbris’s $1.3 billion in assets, about $1 billion is in credit instruments, with the remainder in equities. “On the equity side, the bulk of our assets are in Asia,” Vatchkov tells AsianInvestor.
Aside from Japan, the firm has exposure to Southeast Asian markets such as Indonesia, Thailand and the Philippines and elsewhere in the region.
“We’re extremely positive on Asia,” says Vatchkov, who launched Algerbris’ Singapore office in 2010, relocating from London, where the firm is headquartered.
Algerbris’ credit exposure to Asia is low, although the firm is closely following the development of the contingent convertible – or so-called ‘coco’ – bond market in the region, particularly in the mainland.
Over the past few years, the hybrid bonds have been issued by major European banks. They have explicit triggers that may lead to conversion to equity, or a write-down (either temporary or permanent) that is contingent on a pre-defined event.
Cocos are used to raise money in order to meet the new capital requirements under Basel III rules, offering attractive yields of 7-11%, depending on the issuer.
While there has been very little issuance in Asia, investors from the region – largely through private bank channels – have been big buyers of cocos overseas. They have accounted for an estimated 50-60% of new coco issuance from Europe. Much of the issuance has come from banks, including Barclays, Credit Suisse and Rabobank.
It is only a matter of time before Asian banks, including those in the mainland, start issuing cocos, says Vatchkov.
He points to China Banking Regulatory Commission guidelines released in December that would allow mainland banks to offer non-equity tier-1 capital that comply with Basel III regulations. Banking analysts predict it will pave the way for the issuance of cocos in China.
Algebris runs a $920 million CoCo Fund that was up 59% last year. The firm is keen to have exposure to coco assets in Asia in the long run, but much depends on the quality of the issuance, says Vatchkov.
“I suspect that because Asia sailed through the global financial crisis a lot more easily [than the West], when the issuance does come, we’re not going to see the same attractive yields.”
He adds that there is an incentive to issue cocos in Asia, given the existing interest from within the region.
“If it does come to Asia, from an issuer’s perspective it’s going to be very interesting,” says Vatchkov, “because a lot of Asian investors already own these products.”