A golden opportunity on Australia's doorstep most people aren't looking at in 2022

The '90s were a golden period for distressed debt investors in the US, with big names such as Oaktree Capital and Elliot Management being forged during this firesale. Today, a similar opportunity exists elsewhere in the world, as Tribeca's John Stover explains here. 
Matt Buchanan

At first glance, a former professional in the Australian National Water Polo League with a BA (with Honors) from Princeton might make for an unlikely expert on Asian credit markets.   

But look a little closer at Tribeca's John Stover, and you'll see a 12-year career at Farallon Capital Management, a global multi-strategy hedge fund firm, during which he spent nearly a decade in the Singapore office.

You'll see that while there he developed credit and lending credentials, raised private capital for corporate restructuring and acquisitions, and deepened his expertise in mining, metals and industrials (also serving on the Audit Committee of PT Agincourt Resources, which owns one of the largest gold mines in Indonesia). And you'll see that since 2019, he has been portfolio manager for the Tribeca Vanda Asian Credit Fund.  

So when he talks about opportunities in Asian credit markets, markets he says are growing by about 5 times in the past 10 years, with "the high yield part of that market growing by about 10 X"  it makes sense to sit a little straighter, tug our chairs a little closer, and lean in and listen.

"The market is still only the same size as the US was in the mid-nineties," Stover told Livewire.

"And that decade was really a golden period of investing for high yield in distress credit in the US.  That's really when some of the larger managers such as Oaktree Capital Management and Elliot Management Corporation became what they are today.

So we see that same opportunity set in Asia over the next decade."

To find out more about why Tribeca is so positive this market is going to continue to grow pretty rapidly over the next decade, and the role mispricings and inefficiencies play in the opportunities he sees, please watch the video below.

This transcript is edited for clarity and length

How would you describe the current state of the Asian credit market?

The Asia credit market has grown by about five times over the last 10 years and the high yield part of that market's grown by about 10 X. But it's still only the same size as the US was in the mid-nineties. And that decade was really a golden period of investing for high yield in distress credit in the US.

That's really when some of the larger managers such as Oaktree and Elliot became what they are today. So we see that same opportunity set in Asia over the next decade. 

That's part of the reason why we're really excited to be launching this Australian unit trust that's focused on that part of the market is that we really see this market's going to continue to grow pretty rapidly over the next decade, but it's still quite inefficient.

You see a lot of misspricings and flow-driven moves where someone in London or New York will make a decision to allocate less capital to Asia credit.

And that'll set in motion, some large selling by say, long-only funds in the space. And we can take advantage of those mispricings and opportunities. It's also very under-researched. So if you compare what's written in terms of literature on the sell-side for equities versus credit, it pales in comparison.

There's much more written on single name stock research versus what you see in companies for Asia credit. So in that respect, it's growing rapidly, but still quite inefficient. 

And so that allows a lot of, I guess you can have an opportunity for informational edge and analytical edge that we try to take advantage of.

After a difficult 2021 for markets, are you optimistic going into 2022? 

If you look at the yield on the index for Asia high yield, it's about 12% at the moment, and that's close to all-time highest levels. You, really only see these levels in times of global crisis, like the European financial crisis, one or two weeks during March 2020 during the COVID period, global financial crisis. 

We think that the initial backdrop is quite interesting. And if you look at it relative to what you see in the US and Europe, the differential yield is also the highest of all time. We think both on an absolute basis and a relative basis, it's quite interesting.

So that's part of the reason why we're pretty bullish on the market over the next year or two.

The Asian high yield credit market has a current yield of 12% - does this imply a significant amount of risk?

Often people think that, but we do a lot of work on the fundamentals of the businesses. And so what we're looking for, number one is an improving credit profile. So improving fundamentals, which could mean a cyclical rebound in an industry, it could mean improvement in the competitive position of a business within that industry. And number two, we're looking for high quality corporate governance. 

We only invest in companies that we know the management and shareholders, we're very comfortable with the corporate governance, which I think is paramount in investing in this region.

And so, I think, it sort of goes back to what I was mentioning before, where what we've seen is a lot of the flows have gone into the US and Europe over the past couple years coming out of COVID and that's because European Central Bank and Federal Reserve now say, we're going to start buying individual corporate bonds, and you didn't have that dynamic in Asia.

So that allocation decisions have been set, at a global level have been moving money into US and Europe and outside of Asia.

I think if you look at that yield on the index that doesn't necessarily have to do with the fundamentals of the individual businesses within that. It can just be outflows from the space that's caused to, the bonds to sell off. And then, and the yields to go up.

How is the crisis in the Ukraine impacting the Asian high yield space?

Obviously, the biggest impact in the markets we look at has been the rising commodity prices. And you've seen oil prices, base metals, so nickel and copper shoot up pretty dramatically.

The way we've been looking to take advantage of that is we've had exposure to the natural resources base, both metals and mining and energy. And that's been a key call within Tribeca over the last year or so. 

Those companies obviously will benefit with the rising commodity prices. So their fundamentals are actually doing better, but of course, this sentiment in markets broadly is going to get hit by Ukraine and Russia and that's led to a sell-off across markets, whether it's credit or equity.

We actually like that opportunity because we see the business fundamentals getting better for these companies, but the prices of the bonds have actually fallen. So that often is a pretty interesting opportunity for us to start buying.

Why should Australian investors be interested in this fund?

The fund gives access to a part of the market that I don't think most Australian investors have looked at necessarily or have access to. It's kind of the opportunity on the doorstep for Australia that most people aren't looking at. So we invest in the Asia corporate credit market.

We also invest in Australia, which has been about 20, 25% of the fund, but more broadly it's within Asia. So Southeast Asia, North Asia, India, et cetera, and the yields on offer there are much higher than what you see in Australia.

I mentioned the index yield is about 12% at the moment. You compare that to other yield options in Australia, whether it's government bonds at 2%, bank hybrids three, 4%, equity dividend payers, four to five high per cent. 

So we're much higher yielding and have actually been able to outperform those other asset classes, inception to date going back to July 2019.

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Matt Buchanan
Matt Buchanan

Matt Buchanan is a former Head of Content at Livewire Markets. Matt is an avid investor and a big fan of the Livewire community, which he first joined in 2017.

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