(Bloomberg) — The regulatory headwinds and economic uncertainties weighing on China’s technology stocks have also hit the sector’s dollar bonds, a selloff that has some credit investors upbeat on future performance.
The notes’ spreads have started widening again after March’s swing, leaving them very high and attractive given many tech companies are cash-rich and lightly leveraged, said Jean-Louis Nakamura, Asia Pacific chief investment officer at Lombard Odier. The firms’ debt-repayment abilities haven’t been affected by the regulatory concerns, which “are mostly a problem for equity owners,” according to Phillip Torres, global co-head of emerging market debt at Aegon Asset Management in Chicago.
Dollar-bond spreads for Tencent Holdings Ltd. have widened at least 30 basis points this year, according to data compiled by Bloomberg, and they’ve expanded as much as 80 basis points for Alibaba Group Holding Ltd. There’s been fresh weakness lately as fixed income globally continues to struggle. For equities, the Hang Seng Tech Index is down 32% in 2022, partially on worries about Chinese regulatory action that’s hit areas from e-commerce to online education to gaming.
Tech firms’ spreads narrowed some after China’s top financial policy body vowed in March to among other things ensure stability in capital markets and complete the crackdown on Big Tech “as soon as possible.” More policies could be on the way, state media outlets reported last week.
Another factor weighing on the dollar bonds could be recent weakness in U.S. investment-grade debt, Goldman Sachs analysts including Kenneth Ho recently wrote. Such investors likely have a higher presence in China’s high-grade tech, media and telecom market than other domestic sectors, and 7- to 10-year TMT names have fared worst of late in the single-A area, according to the report.
But those notes’ weakness being linked to U.S. investment-grade declines “is likely to be temporary, and spread widening due to market technicals is an opportunity,” said the Goldman analysts.
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