Not for the faint-hearted — buying N.Korea debt

December 21, 2011

Distressed debt broker Exotix, which specialises in the kind of bonds most of us are too risk-averse to touch, recommends buying North Korean defaulted debt following the death of Kim Jong-il.

Stuart Culverhouse, chief economist at Exotix, says the debt, which matures in 2020 but could be rolled over if holders agree, could reach 20-22 cents on the dollar near-term, from 14-18 now.

Risk-hungry investors buy rock-bottom defaulted debt  in the hope that terms of any settlement with creditors will be worth the investment.

According to Culverhouse:

One parallel for how North Korean debt prices could react occurred after the October 2006 nuclear test when the debt rose from around 18 at the time to 32 by January 2008 after the resumption of the Six Party denuclearisation talks. However, prices later dropped as progress under the talks quickly proved elusive. This time around, investors may look for something more durable before entering the market.

North Korean debt could potentially attract the same type of investor, often hedge funds, who have bought Greek debt in the hope of a favourable restructuring. With Greek 1o-year debt trading at 21 cents on the euro, a haircut of only 50 percent looks like an attractive offer, even though one hedge fund walked out of the Greek debt talks last night.

Ivory Coast defaulted on its debt nearly a year ago, but the debt remains included in benchmark indices compiled by JPMorgan, and is trading at 50 cents on the dollar as investors hold onto the Ivorian government’s promise to make good on interest payments next year.

North Korea could take its cue from Iraq, Culverhouse says, which restructured debt with the London club of commercial creditors (in contrast to the Paris club of sovereign creditors) in 2006. The debt is also included in JPMorgan’s index and  is trading at a healthy 80 cents on the dollar.

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That’s a heck of way to make money. I would suggest that there is blood all over those bonds.

Posted by A.deWitt | Report as abusive