Idea of the Week: Defensive Corporate Bonds Under Tariff Wars—Corporate Bond Yields Up to 8.6%!

Recent signs suggest a cooling in the tariff war, following Trump’s announcement of a 90-day suspension of reciprocal tariffs. Countries such as Japan, South Korea, and India are reportedly close to reaching partial trade agreements with the U.S., while Trump’s stance toward China has softened to some extent.

However, we believe tariffs still carry significant uncertainty. After the 90-day period, negotiation outcomes between countries and the U.S. will vary. Some countries may secure better trade deals, but others could face tariffs higher than 10%. Even in the most optimistic scenario, all countries will face at least a 10% baseline tariff (i.e., maintaining the status quo), which will reshape global trade systems, posing risks to corporate fundamentals and profitability.

Referring to Table 1, McKinsey’s report, Globalization in Transition: The Future of Trade and Value Chains, classifies industry value chains into six categories: four production-related and two service-related.

Table 1: McKinsey’s Industry Classification, Trade Intensity and Direct Impact of Tariff Wars

Based on their trade intensity, industries are affected differently by global supply chain disruptions. Service industries and regional production types are more resilient to tariff war risks, while global innovation and labor-intensive goods industries face higher risks.

From a business model and bond investment perspective, we believe investors should focus on the following six defensively positioned companies and their bonds:

• These companies are non-U.S. issuers, primarily operate locally in their respective countries, rely less on global supply chains, or belong to labor- or knowledge-intensive service industries, making them less directly impacted by recent tariff wars.
• Their operational conditions, revenues, and profit margins are less affected by trade system restructuring and changes in the global economic order, likely ensuring more stable credit profiles.
• These defensive corporate bonds should face lower risks of credit spread widening compared to others, while currently offering better relative or absolute yield to maturity.

1. Meituan

Meituan is a Chinese e-commerce platform providing services such as food delivery, dining, entertainment, logistics and travel. The group was founded by its current chairman, Wang Xing, in 2013.

In 2024, Meituan’s revenue reached approximately RMB 337.6 billion, up 22% YoY. Operating profit surged 144% YoY to RMB 45.1 billion, driven by strong growth and improved profit margins across its three main segments (Food delivery, In-store, hotel & travel and New initiatives), alongside a 64% reduction in operating losses from new businesses & others to RMB 7.3 billion, reflecting strong operational performance.

As of the end of 2024, Meituan’s total debt was only RMB 55.8 billion, significantly lower than its total cash of approximately RMB 90.4 billion. The Group also held RMB 97.4 billion in short-term wealth management products, reflecting a net cash position and a very healthy leverage level. With an interest coverage ratio of 27.6 times, Meituan demonstrates excellent interest payment ability and low credit risk.

Notably, as Meituan’s peak investment period has passed, we believe future annual capital expenditures and R&D expenses will be covered by operating cash flow. The company is also expected to turn its New initiatives segment profitable within the next one to two years, indicating a promising outlook.

Currently, Meituan bonds offer yields to maturity from 4.7% to 4.9% (see Table 2), suitable for investors seeking stable returns.

Table 2: Meituan Bonds

Related Article: Idea of the Week: Meituan - Can China's food delivery giant survive the "Consumption Downgrade"?

2. CTF Services

CTF Services is engaged in highways, construction, insurance, logistics, facilities management, and other investments (including strategic investments and dividends from JVs and associates), contributing approximately 27%, 14%, 22%, 14%, 2% and 22% to its adjusted operating profit respectively.

In the first half of fiscal year 2025 (from July 2024 to December 2024), CTF Services’s adjusted EBITDA fell 5% YoY to HKD 3.56 billion, mainly due to underperformance in facilities management and the expiration of a Guangzhou highway concession. However, these headwinds were partially offset by growth in insurance and logistics segments. The overall performance remained stable.

In terms of credit profile, as of the end of 2024, CTF Services’s net gearing ratio and net debt/adjusted EBITDA dropped to 48% and 2.6x respectively, reflecting healthy leverage. Its interest coverage ratio reached 4.3x, with average financing costs falling to 4.2%, indicating solid credit performance.

With HKD 11.3 billion in undrawn credit facilities available for business expansion or refinancing, the Group maintains strong liquidity. Coupled with stable business models in most of its operations and high cash flow visibility, its overall default risk remains low.

CTF Services’s “NWSZF 6.375% 22Aug2028 Corp (USD)” and “NWSZF 4.250% 27Jun2029 Corp (USD)” bonds offer yield to maturity of 7.9% and 8.6% respectively, making them attractive for investors seeking stable income.

Related Article: Idea of the Week: CTF Services – If Disposing All Toll Road Businesses, Can It Repay Debt on Time?

3. Muthoot Finance

Founded in 1939, Muthoot is India’s largest gold loan company, specializing in short-term lending secured by gold jewelry, bars, or coins.

In recent years, the Russia-Ukraine war and the Trump administration’s tariff policies have heightened concerns over global economic stability, driving demand for gold and pushing its price to record highs. Rising gold prices have increased the value of gold-backed collateral, improving loan-to-value (LTV) ratios and enabling borrowers to secure higher loan amounts—further fueling demand for gold loans. Supported by India’s strong macroeconomic environment, which has maintained an impressive 7.6% average GDP growth over the past three years, Muthoot has experienced robust expansion. As of September 2024, its gold loan portfolio reached INR 930 billion, marking a remarkable 34% year-on-year increase, well above the average growth rate.

Driven by its strong lending business, Muthoot generated INR 142 billion in interest income in the first three quarters of FY25 (Apr-Dec24), reflecting a 34% annual growth. The company’s net interest margin also expanded by 0.5 percentage points to 11.6%, supporting a 19% increase in net profit, which reached INR 39.1 billion—demonstrating solid overall performance. Looking ahead, India’s accelerating economic growth and sustained high gold prices are expected to support Muthoot’s continued operational strength.

From a credit perspective, as of December 2024, Muthoot’s loan-to-value ratio remained stable at 66%, leaving room for mitigating potential loan losses through collateral liquidation. While its non-performing loan (NPL) ratio increased slightly from 3.7% to 4.4% year-on-year, the company remains well-capitalized, with a capital adequacy ratio of 25.1%, significantly exceeding the regulatory requirement of 15%.

Recently, S&P upgraded the company's credit rating from BB to BB+, reflecting its credit quality improvement. Both the issuer and bonds are now rated as BB+/BB (S&P/Fitch).

Muthoot’s "MUTHIN 7.125% 14Feb2028 Corp (USD)" and "MUTHIN 6.375% 23Apr2029 Corp (USD)" bonds currently offer attractive yields to maturity of 7.0% and 7.1%, respectively, making them valuable investment options within India’s high-yield segment.

Related Article: IOTW: India's Largest Gold Finance Company Muthoot Yields 6.5% Returns with Acclaim!

4. Rakuten Group

Rakuten Group’s core businesses span e-commerce, financial services, and mobile communications. In e-commerce, Rakuten is Japan’s largest local platform based on 2024 gross merchandise value (GMV). In financial services, it operates subsidiaries such as Rakuten Bank and Rakuten Securities. In 2018, Rakuten launched Rakuten Mobile, entering the mobile communications market.

All three main businesses (e-commerce, financial services, and telecom) recorded revenue growth and profit increases (or reduced losses). E-commerce and financial services demonstrated strong profitability, while the telecom business exerted less liquidity pressure than in the past and achieved positive monthly EBITDA in December 2024. Overall operational performance was steady with progress.

Table 2: Rakuten Group’s Operating Performances

As of the end of 2024, Rakuten Group’s (at the Group level) net gearing ratio and total debt/other assets fell to 40% and 34% respectively, significantly improved from the previous year. Using total market capitalization (reflecting the Group’s equity financing ability) instead of total equity, the net debt/market capitalisation ratio was 46%, indicating a manageable leverage level.

Given Rakuten’s high-quality assets, such as Rakuten Securities and Rakuten Credit Card, potential liquidity sources include equity financing or asset sales. Combined with strong profitability in e-commerce and financial services and telecom’s shift to profitability, we believe the group’s short- to medium-term credit risk is under control. Investors could consider its 2027 USD bond, “RAKUTN 11.250% 15Feb2027 Corp (USD)”, with a yield to maturity of 6.4%.

Related Article: Idea of the Week: Rakuten Group—A Japanese Conglomerate with Strong Equity Financing Ability!

5. Just Group

Just Group is a UK financial services group primarily offering pension products and management services. Its core products and services are defined benefit (DB) de-risking solutions, focusing on pension buy-in and buy-out markets, which account for 82% of its premium income. These DB products offer stable cash flows and have a high degree of customer stickiness.

In 2024, Just Group’s new business sales revenue reached GBP 4.28 billion, up 42% YoY, with new business profit rising 30% to GBP 450 million, maintaining a new business profit margin of around 8.7%. The strong demand in the DB market led to a 61% surge in transactions to 129 deals, driving the Group’s new business sales and profits. The overall performance was solid.

In 2024, Just Group’s underlying operating profit after attributed tax rose 34% YoY to GBP 500 million, driven by significant increase in profits from new business. The annualized return on equity increased 180 bps to 15.3%, reflecting strong performance in profitability.

With the interest rate hike cycle starting in 2022 and the recent rapid growth, Just Group’s shareholder capital coverage ratio (CCR) (= total eligible own funds/solvency capital requirement) rose to 204%, a record high.

Given Just Group’s consistent generation of substantial cash flows, the cash generation from operations should effectively offset adverse impacts from potential interest rate declines. We believe the group’s shareholder capital coverage ratio can be maintained at the current high level over the next few years. The credit performance is strong.

The “JUSTLN 8.125% 26Oct2029 Corp (GBP)” bond does not include loss-absorption clauses like those in bank Tier 2 bonds, offering an advantage over typical bank bonds. With low credit risk and a yield to maturity of 5.8%, it is highly attractive for investors seeking stable income and exposure to GBP assets. However, note that this bond includes deferred interest payment and extendable tenor.

Related Article: Idea of the Week: Just Group – Around 6% Yield Investment Grade GBP Bond

6. FWD Group

FWD Group, founded by Richard Li, is a Hong Kong-based insurance company operating across 10 markets, including Hong Kong, Singapore, and Japan. The company serves over 13 million customers, offering life and health insurance, general insurance, pension trust services, and financial planning solutions.

In 2024, FWD maintained strong business growth, with annualized new premiums reaching USD 1.92 billion, marking a 14% year-on-year increase. New business value also grew 11% to USD 830 million. The company actively pursued cost management strategies, reducing expenses and achieving a notable 22% increase in post-tax operating profit (excluding one-time and non-operating items), while also recording its first-ever accounting profit.

FWD’s credit position remained stable, with its solvency ratio declining from 292% at the end of 2023 to 260% at the end of 2024—primarily due to a regulatory adjustment rather than a significant change in surplus. Despite the decline, the ratio remains well above the 100% regulatory requirement, ensuring ample capital buffers. Additionally, the group's leverage ratio (total debt to total capital) remains at a controlled level of 25.5%.

Our platform offers a selection of FWD-issued bonds, including perpetual and non-perpetual bonds. Among the non-perpetual options, the junior subordinated bond "FWDGHD 8.400% 05Apr2029 Corp (USD)" offers an attractive 7.5% yield, significantly higher than other dated bonds and comparable to perpetual bonds. While junior subordinated bonds carry higher risk due to lower repayment priority, FWD’s solid financial performance and strong credit profile make this bond a compelling choice. Additionally, its shorter maturity positions it among the earliest debts to mature, further enhancing its appeal.

For investors seeking less exposure to junior subordinated risk, alternative options with higher repayment priority are also available based on individual preferences.

Related Article: FWD maintains rapid growth while delivering its first accounting profits