Tarnished Metal: A Japanese Credit Play

As Chinese headwinds buffet Asia, and as the global steel industry staggers in step with the Middle Kingdom, conditions are looking ripe to get short the investment-grade debt of Japan’s second- and third-largest steelmakers, JFE Holdings and Kobe Steel. Despite the serious equity collapse the two companies have suffered as a result of adverse macro forces, their bonds are defying gravity and their CDS spreads are far tighter than any comparable firm’s. There looks to be a lot of room to go on this one, and not much risk.

Times are not good in the steel business, no matter where you are in the world. After a decade-long super-cycle driven by China’s explosive growth, things have unwound quickly. A global economy makes for global problems, especially when a sector …

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