Wednesday, January 26

Major emerging market bond funds gamble on Sri Lanka’s windfall from default

A top emerging market money manager who made a profit on Ecuador’s restructured bonds is now waiting for Sri Lanka to stop paying to load the nation’s debt.

Carlos de Sousa, who oversees a $ 3.8 billion developing-nation bond fund at Vontobel Asset Management in Zurich, expects the South Asian country to run out of money to pay creditors by mid-year, even after that the central bank promised to meet its obligations this month. The Venezuelan-born investor already owns the bonds and is waiting for a default-induced selloff to buy more, betting that the average recovery value of the bonds could exceed current prices.

Most of Sri Lanka’s foreign bonds have lost about half their value since the start of the pandemic to trade around 50 cents on the dollar as foreign exchange reserves dwindled. Travel restrictions have hit the tourism industry, which accounts for about 5% of the economy, while prolonged lockdowns hurt commerce and industry. The island nation is now considering a bailout from the International Monetary Fund.

“The bonds are so cheap that the recovery value is above current prices,” de Sousa said. “The default probability is greater than 50%.”

Sri Lanka has $ 15 billion in foreign bonds outstanding, and the next principal payment is due in two weeks. On Wednesday, the central bank governor tweeted that $ 500 million had been set aside to repay holders on January 18. In July, the nation has another major payment of $ 1 billion.

Vontobel’s emerging markets debt fund, which De Sousa has helped oversee with Luc D’Hooge since early last year, outperformed 93% of its peers in the past five years, according to data compiled by Bloomberg. In 2021, the fund outperformed 84% of its competitors.

The 34-year-old investor attributes part of the fund’s earnings to a bet on Ecuador’s bonds before the April presidential election. A surprise victory by a former banker spurred a 20-cent rally in banknotes in a matter of days, making them one of the best-performing countries in the developing world just a year after the nation restructured $ 17.4 billion in international debt. Vontobel’s fund held approximately 2.5% of its holdings in Ecuadorian bonds as of August, according to a company statement.

Bets on a rally in Colombian bonds after the nation was downgraded to junk and a position in Angolan debt, which also had double-digit returns last year, also contributed to that performance, de Sousa said.

Other frontier market bonds rewarded investors with stellar returns last year. Zambian bonds soared more than 30 cents in the week after the election of a market-friendly president, giving creditors yields that approached 50%. In Belize, a debt restructuring spurred double-digit gains for investors.

For this year, De Sousa’s most convicting deals include overweight positions in Argentina and Tunisia, where he expects the IMF deals to materialize in 2022. He also acquired bonds from the Bahamas, a country that he says is too rich to have. a double. -digit, as well as warrants for the GDP of Ukraine, bonds in dollars of Petróleos Mexicanos, debt of Egypt and notes in euros of Ivory Coast.

© 2022 Bloomberg

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