Singapore: Vedanta Resources Plc rewarded its bravest bond holders with a 132% return for sticking with the group after its financial distress in 2015. As commodity prices rebound, some investors say the rally isn’t over.
The gains came as Vedanta notes approached par value from as low as 44.56 cents on the dollar in January, a surge that helped push Indian dollar junk bonds toward their best performance since 2012, according to a Bank of America Merrill Lynch index. Lombard Odier (Singapore) Ltd recently bought more securities, while Invesco Ltd sees more upside as the nation’s biggest aluminum and zinc producer focuses on paring debt.
Billionaire Anil Agarwal’s London-listed group is seeking to merge energy and mining units, which HSBC Holdings Plc said will give it access to $3.5 billion in cash. Vedanta also won access to a healthy dividend after buying a 35% stake in Hindustan Zinc Ltd from the government in March. Moody’s Investors Service raised its rating on Vedanta for the first time since 2013 as lenders gave it more time to comply with debt covenant tests.
“We continue to be investors in Vedanta and have recently increased our holdings,” said Dhiraj Bajaj, portfolio manager at Lombard Odier in Singapore. “We expect markets to now look towards Vedanta to term out their debt maturity profile and refocus on asset growth.”
Vedanta’s 8.25% June 2021 notes traded at 99.24 cents on the dollar on 15 September, after seven months of gains, Bloomberg-compiled prices indicate. The planned merger of its oil and mining units was approved by shareholders this week.
The simplified corporate structure will better align interests among shareholders for the creation of long-term, sustainable value, Agarwal said in a 12 September filing, targeting the green light from authorities by the end of March.
“They will benefit further with regulatory approval to the merger and potential capital market refinancing,” said Pheona Tsang, a money manager at BEA Union Investment Management Ltd in Hong Kong. “We still like the bonds as they still offer value over global peers.”
HSBC wrote in a 13 September note that any widening in Vedanta spreads is a buying opportunity, though its outsized performance is likely over as valuations are now in line with regional peers. Philip Wickham, the bank’s Singapore-based credit analyst, cautioned that liquidity remains stressed pending approval of the merger.
Zinc and crude oil prices have both rallied by more than 18% this year, and are forecast to rise through 2017 in Bloomberg surveys. The Bloomberg Commodity Index rose 6% this year.
“The recovery in commodities has been a big tailwind over the past few quarters,” said Tom Nakamura, a fund manager at Toronto-based AGF Management Ltd.
At 8.44% yield, the 2021 notes offered 722 basis points more than similar-maturity Treasuries, according to Bloomberg data, while the company’s 6% January 2019 notes yielded 7.21% or a 606 basis points spreads. Moody’s upgraded Vedanta notes to B3 from Caa1 on 13 September while S&P Global Ratings raised its B rating outlook to positive from stable on the same day.
“From a valuation perspective and despite its run up, a 600-basis point spread for a single B credit with some trajectory is an appealing asset,” said Jorge Ordonez, emerging-market bond manager in Atlanta at Invesco. “Working in favour of the company are technical factors including the dearth of high-yield issuers in India, valuation and potential upside to metals prices.” Bloomberg