A Tokyo private equity firm is planning to exploit opportunities in Asian convertible bonds with a new fund or managed account program. Wakabayashi Fund portfolio manager Jeff Stone will invest in convertibles of “credit-worthy” growth companies listed in Asia.
“We can also buy existing private or public convertible bonds from distressed sellers that we know at discounts (30% to 50% haircuts) and restructure the CBs with the issuers directly to allow conversion later when the market returns,” he wrote in an email. “Currently, banks are not lending while hedge funds and prop desks have either shut down or in cash mode. So, in our opinion, there is little competition for deals. But the time for investing is now not later.”
China alone has issued some US$17 billion of convertible bonds since 2005, with some issuances now offering yields of between 30% and 70% with put dates in 2010—stemming from real estate developers with solid assets to road construction equipment suppliers to integrated solar energy manufactures listed on the New York Stock Exchange.
Stone said that the strategy’s value-add won’t be just finding the investment targets but also in one-on-one private negotiations and post investment monitoring with each portfolio company.
“These are very time consuming steps not provided by external banks but have proven to be rewarding for investors,” he claimed.
He’s confident that the strategy can achieve 30% internal rate of return, given the current valuation where most companies are trading in the low single digit enterprise value. And as Asia resumes its growth, he said the strategy would revert to growth capital investments including pre-initial public offering convertibles to maximize investment returns.
“It is our opinion after the storm, China and Asia in general will regain growth given the unquestionable long term dynamics in the region. Asian balance sheets are also healthier than they were in the last Asian Crisis,” he said.
Wakabayashi has offices in Tokyo and New York.
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