The Peregrine mafia: volume three

What have been the key trends in fixed income research in the last year or so?
There has been a polarization of Asian credits. It is like a dumbbell. There are plenty of investment grade companies, and then you have the other extreme which is very high-yielding names, such as the distressed names in Thailand and Indonesia. Some of these are yielding over 20% or even 30%. In the middle is the conventional high yield names, which I will define as BB rated or high single B. But there are only half a dozen of these.

In terms of the trading ideas you are giving to your clients, are you giving more on the high yield side or the investment grade side?
It's a combination. Our team supports both. The high grade business is a flow business. It is adequately liquid, and we are seeing more interest from international investors coming back to Asia. Regional liquidity is extremely high. And if you look at the issuance over the past year, it has been at a record high since the financial crisis. So that's been an important business for us.
On the distressed side, it's much more opportunistic and credit intensive. Trading of distressed assets is fairly lucrative to us and we have put a lot of effort in covering the sector.

What have been the most interesting trading ideas you have given to clients this year?
We were pushing GH Water and the original GDE restructuring during the past year. Back then, the original GDE bonds were trading in the high 30s and we looked into the restructuring which we found very compelling. We thought the restructuring proposal should translate to 70 cents a dollar which implied over a 100% return.
The sister company, Guangdong Investment was another good call. The price has gone up 10 points to the mid-80s since the beginning of the year. That translates to a fall in yield from 20% to 13%.
We have also been recommending the "high-quality" distressed names in Indonesia, namely Satelindo, Astra, Garuda and Semen Cibinong. While their prices have been more volatile in the beginning of the year, they all made good progress in their debt repayment.  By August when Megawati was sworn in as president, all these distressed debts saw a massive rally in their prices.

What's your view on PLDT?
The company is still sound. It has spent a lot of resources over the last few years upgrading its facilities, allowing it to increase its subscribers dramatically. But as the capex was heavily funded by debt, its credit ratios have weakened. Therefore, while PLDT's competitive position in the industry has strengthened, the challenge for the company is to manage its balance sheet and capital structure more conservatively.

Are you worried about maturity bunching next year?
It's not that bad. It is just over $100 million. PLDT should certainly act in advance because its ability to tap the debt market is very sensitive to emerging markets sentiment. So it needs to take advantage of market windows. On the other hand, PLDT is one of the blue chips in the local credit market. So there are still a lot of domestic banks which would want to lend.

What percentage of your investors are based in the US versus Asia?
I would say 60% in the US, 20% in Europe and 20% in Asia.

Do you do much rating advisory?
No. We have a dedicated unit doing this.

Do you think there is an inherent conflict in the credit research department doing rating advisory?
There could be some.  It may not be a serious concern for a first time rating. Being a sell-side analyst you know what the rating agencies' methodologies are in looking at a credit. You know their analytical framework and therefore you can advise your clients to present themselves in a way that most effectively communicates their credit story.  And since no bonds are being traded, there would not be concerns about conflict of interest.
For ongoing advisory, I think it's inappropriate. To do your work you may have access to non-public information which is important to be communicated to the rating agencies.

You are part of the Peregrine mafia that now dominates fixed income research.
I am very pleased we have all done well. Abdul Hussain is very good, and Damien Wood has probably looked at more banks in more countries than anyone else. His experience is tremendous.

They have all said very complimentary things about you and how good your coverage of Chinese infrastructure has proven. How many years were you at Peregrine for?
Two years.

Is there still room for an Asian regional investment bank like Peregrine?
Regionalism cannot be well defined for Asia. It's hard to be strong in every country in Asia. Peregrine had strong positions in some countries and weaker ones in others. I think the model for this industry in the future will be a number of global investment banks, which are very good in specific products in specific countries. When you are in the middle, that is a very tough competitive position, because on the one hand you don't have the global reach and the capital base, and you don't have the flexibility of the niche players who are very good in a particular country or product. But there is room for new players who have a product or country focus.