TREA Capital Partners S.V - Emerging Markets Debt Investment Opportunities Focus on India - EFPA Presentation ...
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TREA Capital Partners S.V. Emerging Markets Debt Investment Opportunities Focus on India April 2010
The Emerging Markets Investible Universe
How are Emerging
Markets countries
defined?
There is no simple
comprehensive
answer, but what is
clear is that
traditional definitions
based on macro
variables and credit We would group all countries outside of the US, Canada, Western Europe, Scandinavia, Japan, Australia and
ratings have broken New Zealand as part of the Emerging Markets (EM) investible universe
down during the past
decade
These economies comprise 84% of the world’s population, take up a vast majority of the world’s geography
and close to half of the global economy
EM economies currently account for almost 30% of world trade and an increasing portion of the world’s
consumption
Despite these statistics, EM nations comprise a small fraction of the world equity market capitalization,
providing a tremendous opportunity for investors to capitalize on future growth
2 Source: IMF Data MapperEM Fundamentals Have Improved
High levels of FX
reserves spurred by
exports have allowed
many EM countries to
go from being external
debtors to external
creditors
Coupled with current
account surpluses,
many EM nations have
seen their currencies
appreciate versus their
DM counterparts and
have seen a reduction
in FX volatility
In the 80s and 90s, EM
nations were saddled
with huge amounts of
external debt which
hampered their ability
to grow. Prudent
liability management
and growth of domestic
markets has
decreased the amount
of external debt
outstanding
Domestic markets now
allow EM countries to
fund themselves in
their own currencies
3 Sources: FX Reserves, Debt, JPM; Current Account, Debt Indicators ,IMFEM Fundamentals Have Improved
As fundamentals have
improved, EM countries
have gained share of
world GDP versus the
DM countries
Going forward, we
expect EM nations to
grow significantly faster
than DM nations, as
many of the recent
problems faced by DM
countries (housing,
excessive leverage,
securitization) were
absent from EM
countries
Demographic shifts have
increased the working
age population and are
causing consumption to
rise in the largest EM
economies
Economies are
becoming less reliant on
exports for growth, and
therefore are less
affected by potential
decline in demand from
DM economies
4 Sources: IMF; Working Age Population, UN; Consumption, EuromonitorThe Case For India – Favourable GDP Mix
Indian GDP growth has been and is
forecast to remain strong, trailing only that
in China
Indian never entered a recession in 2008-
09, with GDP growth dropping to 5.5%
before resuming its upward trend
GDP growth has been driven by investment
and consumption rather than exports, in
contrast to many other Asian economies
+ 8,8 %
+ 3,1
+5%
+ 0,9
5 Sources: IMF, WDI (the World Bank Group)The Case For India – Consumption and Investment Drivers
6
Sources: CSO, CMIE, Edelweiss, WDI (the World Bank Group), UNOpportunity: Invest In EM Debt
EM credit, like all risk asset classes, faced Once investors began to focus again on
considerable pressure in 2008 and the fundamentals, this presented significant
beginning of 2009. Fundamentals were opportunities to buy credits which were unfairly
ignored as investors shed risk penalized
indiscriminately
Despite the
improving Macroeconomic conditions Strong liquidity positions
fundamentals,
FX devaluation Limited FX exposure
investors have
historically treated
Refinancing risks Limited refinancing risk
EM credit as a high
beta asset class
Capital flight Strong security/collateral packages for investors
General risk aversion Low leverage
In times of extreme
financial stress, such
as we witnessed in Corporates with implicit and/or explicit support from
2008 and the strong sovereigns
beginning of 2009,
this created massive
opportunities to buy
bonds of strong
fundamentally sound
companies at cheap
levels
7Opportunity: Invest In EM Debt
Although EM credit performed admirably in 2009, and yields declined significantly, EM debt still yields
more than peers in High Grade and High Yield, despite similar or, in many cases, better fundamentals
and technicals
After the dust settled Over the past decade, EM credit has outperformed most of the other asset classes within fixed
and the global income and compares favorably with equities, with lower volatility
macroeconomic
picture stabilized,
investors began to Despite the perception that EM credit consists of low-rated issuers, the reality is that BB and higher
take a closer look at
ratings dominate the space, and EM countries have seen more upgrades and fewer downgrades in the
fundamentals
recent past compared to DM countries, a trend expected to continue
In such an
environment EM New issue supply is still relatively limited compared to High Grade and High Yield, while assets under
outperformed, given
management are rising, potentially creating a virtuous cycle of outperformance
the severity of the
sell-off and the
disconnect between Sovereign and corporate cash flow volume (amortizations and interest payments) were large in 2009
bond yields and
and are expected to continue over the next few years, further supporting price levels as cash is
credit fundamentals
reinvested by bondholders back into the asset class
The existing market is large and liquid with over $8 trillion outstanding, and the growth of domestic debt
markets presents investors with a wide variety of instruments in which to invest
8EM Debt: Risk/Return Profile
EM credit offers a more compelling risk/reward profile over EM equities and should be the core holding in
a portfolio dedicated to the asset class
Creditors are senior in the capital structure and are afforded more protection versus equity holders in
In comparing EM distressed scenarios
credit versus EM
equities, we believe Many EM bond issues have security packages for investors in cases of bankruptcy, while equity holders
that EM credit offers are unsecured and have no such collateral
a more compelling
risk/reward profile
over the The vast majority of EM bonds issued in the international markets in hard currency (USD, EUR) are
intermediate to long governed by New York or London law
term
EM credit has performed better than EM equities over the past 10 years with lower volatility
9 Source: JP MorganEM Debt: Risk/Return Profile
Total Return (Annualised) Volatility (Annualised)
Asset Class 1 Year 3 Year 5 Year 10 Year 1 Year 3 Year 5 Year 10 Year
S&P 500 23,45% -7,70% -1,65% -2,72% 22,31% 19,92% 16,05% 16,12%
Compared to other MSCI EM 74,50% 2,73% 12,79% 7,29% 28,53% 32,66% 27,88% 24,83%
fixed income asset JPM HG 16,72% 6,27% 4,94% 6,91% 6,51% 8,46% 6,94% 6,08%
classes, as well as
JPM GLOBAL AGG BOND 6,08% 7,65% 4,96% 7,10% 8,19% 7,75% 6,60% 6,39%
equities, EM debt
has a higher return JPM EURO HY 73,44% 3,68% 5,04% 1,22% 15,59% 19,13% 14,85% 13,79%
with limited volatility
JPM EM CORP BOND 41,73% 7,20% 6,97% 8,97% 9,25% 16,64% 13,12% 11,17%
over multiple time
periods JPM EM SOV BOND 29,82% 6,63% 7,99% 10,90% 7,09% 12,92% 10,47% 9,46%
Source: JP Morgan
EM sovereign debt has outperformed comparable other asset classes over 10 years
EM corporate debt is the second best performing asset class over this period
Lower volatility than either High Yield or Equities
A portfolio manager with experience in EM and credit will be able to generate excess return over
the indices
10EM Debt: Risk/Return Profile
Almost 50% of EM sovereigns are rated
Investment Grade and almost 70% are
rated BB or higher
Many investors have Compared to DM, where the majority of
the incorrect ratings action over the past 3 years has
perception that the
been downgrades, 70% of EM sovereign
vast majority of EM
ratings actions were upgrades
countries are
generally rated
below Investment This trend is expected to continue over the
Grade next few years, as many sovereigns have a
Positive Outlook, one step before receiving
an upgrade
However, due to
ratings upgrades
which have only
accelerated over the
past 3 years as
fundamentals
improved, close to
half of all EM
sovereigns are now
rated Investment
Grade
* Long Term Foreign Currency Ratings
Source: Bloomberg
** Ratings changes over the past 3 years
11EM Debt: Investment Process
Macroeconomic View Drives Optimal Portfolio Allocation
The investment Instrument Selection
process for the debt Global Macro Backdrop
-Sovereign vs. Corporate
portfolio consists of -Expansion vs. Recession
-External Debt ($ and EUR)
a top down approach -External Shocks
to formulate a macro -Local Currency Debt
-Capital & Trade Flow
view combined with -FX Hedges
-Global Rates
a bottom up analysis -Long or Short
for securities
selection and
Local Macro Backdrop Qualitative Analysis
portfolio construction
-GDP Growth & Composition -Transparency & Liquidity
The equity overlay -Inflation & Rates -Management Track Record
will be based on the -Fiscal & Debt Indicators -Legal Analysis
top down -FX Reserves
macroeconomic view
and used to hedge
Region & Country Selection
the core portfolio to Credit Fundamentals
limit downside risk - Latin America - Cash Flow Metrics
- CEEMEA -Covenants & Collateral
- ASIA -Capital Structure
12Opportunities To Invest in India: Macro & Micro Themes
Key Beneficiaries: 2009 elections reaffirmed political stability and pave way for continued reforms and FDI flows
Banks
GDP growth is projected to be strong and driven primarily by consumption and investment
Healthcare
Consumer High savings rate, rising incomes, large upwardly mobile middle class and favorable
Discretionary demographics should support the consumption and investment theme
Capital Goods
Household balance sheets have large net asset positions – assets five time greater than liabilities
Raw Materials
Corporate balance sheets also moderately leveraged. Balance sheets expansion has been
driven by equity investments
India has tremendous infrastructure needs over the next decade. Needs can largely be funded by
domestic savings which will be intermediated through the banking system
Banking system is robust and not burdened with many of the problems which have plagued
banks in the developed markets
Keep an eye on the tightening cycle as the central bank removes liquidity from the system to
contain inflationary pressures and drain excess credit to prevent asset bubbles
Fiscal deterioration, rising govt debt and inflation are challenges which need to be monitored
13Opportunities To Invest in India: External Bonds Available
Out. Amt Current Avg.
Issuer Name Sector Maturity ($mm) S&P Mdys Yield Price Spread Yield Life Dur
Bank of India Financial Sep 22 2016 240 BB Baa3 6.50 100.50 186 6.53 6.43 5.30
Bank of India Financial Sep 22 2021 240 BB Baa3 6.50 100.50 220 6.87 11.43 8.03
ICICI Bank Financial Jan 12 2012 750 BBB- Baa2 5.49 104.25 63 3.21 1.74 1.66
ICICI Bank Financial Oct 03 2012 2000 BBB- Baa2 6.20 106.38 131 3.89 2.46 2.31
ICICI Bank Financial Apr 30 2022 750 BB Ba1 6.61 95.38 263 7.30 12.04 8.08
EXIM Bank Financial Jan 22 2015 500 BBB- Baa3 4.75 99.73 223 4.81 4.77 4.27
Indian Oil Energy Jan 22 2015 500 NA Baa3 4.66 101.70 177 4.35 4.77 4.27
National Thermal Utilities Mar 10 2011 200 BBB- NR 5.32 102.88 119 2.25 0.90 0.89
National Thermal Utilities Mar 02 2016 300 BBB- NA 5.54 105.50 98 4.79 5.88 5.03
Reliance Energy Jun 24 2016 100 BBB Baa2 8.19 125.75 161 5.42 6.19 4.75
Reliance Energy Jun 24 2026 100 BBB Baa2 9.38 100.00 470 9.37 16.19 8.08
Reliance Energy Jan 15 2027 214 BBB Baa2 7.62 107.25 281 7.48 16.75 9.14
State Bank of India Financial Oct 23 2014 750 BBB- Baa2 4.54 100.67 185 4.43 4.52 4.06
Tata Electric Utilities Aug 19 2017 150 BB- B1 7.39 112.00 262 6.42 7.35 5.64
Vedanta Basic Materials Jan 15 2014 300 BB Ba2 7.98 109.00 222 6.03 3.75 3.23
Vedanta Basic Materials Jul 18 2018 300 BB Ba2 8.56 110.25 398 7.79 8.26 5.84
Source: JP Morgan
14Why TREA Capital Partners?
TREA Capital Partners was founded in 2006 and is owned by Carlos Tusquets, a well-known figure in
the Spanish financial sector
TREA is a financial services firm focused on asset management (fixed income, equities, fund of funds)
for institutional clients and other qualified investors
TREA Capital TREA has a multidisciplinary and multilingual team, with an average of 10 years of experience in asset
Partners is one management
Spain’s leading
asset management
firms, with an In addition, TREA is the first Spanish financial services which has obtained a dual license from the
experienced team of CNMV (Spanish securities regulator) to manage both hedge fund and private equity vehicles. It also has
portfolio managers the approval to manage investments through registered vehicles in Luxembourg and Ireland
and analysts in fixed
income, equities and
fund of funds
management
TREA has assets
under management
and advisory of over
€1 billion
15EM Investment Team
Rohit Gadkar, Portfolio Manager
Rohit Gadkar is the Portfolio Manager for EM and HY portfolios at TREA. He has over 10 years of
experience working with Emerging Markets and 15 years of experience in Fixed Income. Prior to
working at TREA Capital Partners in Barcelona, Mr. Gadkar worked for 7 years at Bear Stearns
based in New York and London, structuring and originating fixed income securities for Emerging
Markets sovereign and corporate issuers, most recently as a Director on their EM Capital Markets
desk. Prior to the merger with JP Morgan in June 2008, Mr. Gadkar was headed to London to Co-
Head Bear Stearns’ EM Capital Markets desk. Before working at Bear Stearns, Mr. Gadkar
worked for Goldman Sachs in their Fixed Income, Currencies and Commodities (FICC) Division, as
well as for Greylock Capital as a Research Analyst for their Emerging Markets Debt Hedge Fund
Mr. Gadkar started his career in New York with positions in Fixed Income at BlackRock Financial
Management focusing on mortgage-backed and asset-backed securities and at Salomon Brothers
focusing on fixed income strategy
Mr. Gadkar graduated Summa Cum Laude from Duke University (B.A., Economics, Philosophy and
History) and Columbia Business School (MBA, Finance). He is a member of Phi Beta Kappa and
serves on the Board of Directors of G Square Capital Management, a global macro hedge fund
based in New York City
16TREA Capital Partners S.V. Emerging Markets Debt Investment Opportunities Focus on India April 2010
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