The Peregrine mafia: volume two

Have there been any prevalent trends this year in fixed income research?

I deal more with the corporate side, rather than the currency and the sovereign aspect. On the corporate side, we have clearly seen more coverage of distressed and restructured credits. Last year, you had just one or two houses that focused on restructuring or distressed stories, but now there is much more value-added research around in that area.

Has the quality of credit research in Asia improved since the crisis?

Its changed. I'm not exactly sure it has improved, to be honest. Credit research is basically held hostage by the amount, and quality, of data that is available. So it is almost a case of garbage in, garbage out, to a certain extent. Where you are seeing disclosure and transparency trends improve, I think you are seeing better quality analysis come out. But there are still cases we've seen this year where clearly financial statements proved inaccurate. Obviously this dilutes the value of credit analysis. In Korea for example, now you have better interim reporting and slightly better disclosure of cross-ownership of guarantees, and these get more highlighted by analysts.

Does it make life more difficult for you that here in Asia the market seems to be driven more by technicals than fundamentals?

Definitely. From a fundamental value basis it is very difficult to recommend any credit in Asia. To a large extent, credit analysis becomes almost irrelevant or an exercise in default-risk analysis, as opposed to valuation analysis. Or like a credit risk function in a bank where you are saying this company is going to survive, this company is not. But it is not so much this credit is cheap and this one is expensive, because quite frankly every credit is expensive, because of the technicals that drive this market out here.

Even when you compare Asia to another emerging market like Latin America, you have a better sense there where you think value might be created or where you should buy and sell a bond -  as opposed to Asia where you have Korea 08s trading at 120bp over treasuries and you are starting you're analysis of Korean corporates from that point. It makes it a very difficult situation.

Given that technicals are so key, what skillsets do Asian fixed income analysts have that their counterparts in the US may not require?

Credit analysis in the US, or the developed world, can be much more scientific. Out here you have technicals, and the vagrancies of doing business and covering corporates in Asia, which have a very different type of credit risk, which would not be that prevalent in the US, such as cross-ownership structures. Its almost impossible to analyze some situations based on balance sheet data or footnotes in an annual report. It requires a lot more running around the market and figuring who is doing what. It is almost investigative work, as opposed to just pure credit analysis. In some respects, it makes life more interesting, and in other respect more frustrating. The technical aspect leads you to look at a credit and say from all aspects this is a BBB and it is trading at 250bp over treasuries, which is tighter than where similarly rated credits trade in the US, therefore fundamentally it is not good value, but because you have to keep the technical aspect in view, you'd have to say that in Asia that is probably going to be a good total return bond over the next quarter.

A good example is KCRC and MTR bonds which are 100bp over Treasuries. From a fundamental value perspective, those things are extremely overvalued, but in a risk-averse environment, where extremely liquid banks are not willing to lend to corporates, but need to find a home for their liquidity, those are great bonds to own, and therefore those spreads will probably remain as they are.

Regional commercial banks drive these technicals. And for them it is not about relative value so much as risk aversion. Whereas in Western markets you get much more relative value, because the market is not driven by banks but by total-return investors, such as mutual funds.

Do you guys report to investment banking?

No, research is an independent function within CSFB. At the end of the day, if you're looking at who writes our cheques, I would have to say that most of our compensation is determined by the trading and sales side of the firm and not by investment banking and debt capital markets.

How do you split your resources between high grade research and high yield?

We cover the whole spectrum. Clearly, over the last year and a half we've developed a fairly good reputation in the market for distressed and high yield research, and so we do spend probably more time on a percentage basis covering higher yielding, more credit intensive stories. From the start of this year, we have focused across the spectrum. Previously it was a 65/35 split between the time we spent covering the high yield stuff. Now it is closer to a 55/45, spending a little more time on the credit intensive high yield stuff.

We probably write more reports on the high grade stuff, because there are a greater number of high grade issuers, but from a time perspective we spend a little more on high yield.

Do you split the two businesses up like Morgan Stanley does?

We don't split by country or by investment rating. We split it by sector..

How many sectors do you cover?

I cover distressed and energy sector credits, Kevin Aepli covers Telecoms, Technology, & Industrials, Imtiaz Shefuddin does Utilities, Conglomerates and Transportation, Lelyana Kurniawan does toll roads and is the Asian generalist based in the US and Jae Ahn does banks..

Has your bank analyst really upped his output on subordinated bank debt this year?

Yes. Jae's Korean/American background helps, and he has also done quite a bit of work on the Thai issuers. He has put out pieces on Hong Kong and Singapore, so he pretty much covers the spectrum. Banks have been a big factor this year, not only in terms of investor interest but also in terms of new issuance. Having a good bank analyst is key in this market.

Given you spend so much time looking at distressed situations, does that mean you mostly talk to hedge funds?

I spend a large amount of my time doing so for my credits. But I also have the role of marketing the rest of the team's research, and that is dispersed among banks, mutual funds as well as hedge funds.

How important has the Asian bid been this year?

It has been very important. It has been important in the sense that because Asian banks have been reluctant to lend, these guys have been a ready bid for a lot of corporate debt. For example, the SK Corp deal we did in April was pretty much purely an Asian deal. We placed a little bit in Europe, but it was done with the full intent of taking advantage of the Asian bid.

When you have a very good research idea, how many of the first 20 phone calls would be in Asia versus the US?

It depends on the type of research idea. If it is a liquid high grade call, then probably 60%-70% of the conversations would be in Asia, but if it is high yield or a duration extension trade, beyond the usual five years, then it flips around and almost 80% of your calls are to Europe and the US.

What are the research calls your team has made this year that you are most proud of?

On the distressed side we had a buy on Semen Cibinong at the start of the year, which has yielded a 25% return in a tough market for Indonesian distressed credits.  We also had a call on GS Superhighway which we put on when the bonds were down in the 60's, we kept that on at the start of this year and those are above par bonds now..On Hynix, we have been calling for a sell on anything related to it for almost a year. Hynix Semiconductor North America has some bonds and we have had an unattractive or a sell on them since almost a $70 price and they are now trading at floor levels. On Korean sub-debt, we have held off on KEB because of the Hynix issue, and we have been relatively bullish on Hanvit and Cho Hung.

We still have a sell on Hynix Semiconductor North America bonds, whose credit is inextricably tied to Hynix. We understand the social and political situations in Korea that require that the company be saved, but the problem is the way it is being done is going to lead to continued volatility. Especially given it is in a capital-intensive business. Every day it can't spend on capital equipment it falls further behind in the race and that starts to threaten the basic business. That's the biggest fear we've always had with Hynix.

How do you handle rating advisory?

We don't handle that. It is a separate area of the bank. It works with debt capital markets.

There is something of a Peregrine mafia in the fixed income research area - you, Greg Batey at JPMorgan, Ivan Lee at Salomon, and Damien Woods at ING Barings.

Yes there is. We've all landed on our feet.

Why do you think Peregrine was able to foster such talent in this area?

The experience you got at Peregrine was tremendously beneficial. I was only at Peregrine for the last five months of its existence. But I learnt more about Asia and Asian credits and the way business is done here, than I would have done at any firm in two or three years. It was 100% Asian firm, so you had to learn the nuts and bolts about doing business in Asia. And that is why we have been successful afterwards.

Do you think there is still scope for a 100% Asian firm like Peregrine?

Yes, I do. If it wasn't for the poor risk management, Peregrine would still be successful today. The business model and the types of business they would have done in subsequent years would have been tremendous. The basic business they did pre-97, originating all kinds of transactions and placing them with non-credit sensitive banks, would have to change. But the knowledge and the depth of contacts and the types of coverage they provided to middle tier businesses, is still missing from the market right now.