Forgive and forget in emerging debt?

October 24, 2012

If you’re an emerging market borrower, it seems like it’s a great time for sorting out those old troublesome debts as pumped-up yield appetite in the fixed income universe encourages another bout of selective amnesia among creditors and bond investors.

Serial defaulter Ivory Coast met investors in London this week, next stop New York later today, to discuss a new schedule for missed coupons on its $2.3 billion bond due 2032.

The West African country defaulted on the bond early last year during political unrest which later broke into civil war. That bond was launched only in 2010 as a restructuring of previous debt on which Ivory Coast defaulted in 2000. If that isn’t confusing enough, the 2000 default was of  U.S.-underwritten Brady debt, which  itself was a repackaging…

Meanwhile, Kazakh bank BTA, owned by the country’s sovereign wealth fund, this month agreed a $11.2 billion debt restructuring deal, after it defaulted earlier this year. The sovereign wealth fund, Samruk-Kazyna, had already stepped in to help the bank with a restructuring in 2010 when it defaulted during the global financial crisis. So this was the second default in the space of two years.

But demand is such for high-yielding emerging market debt, particularly in commodity-rich countries, that investors are likely to forget the past as they lap up the present juicy yields.

Ivory Coast’s bond has leapt since the world’s top cocoa grower said earlier this year it would resume coupon payments on its bond. The bond, which starts paying back principal ahead of maturity, has soared 40 cents on the dollar this year and 5 cents in the last week, when news emerged of meetings to discuss three missed coupons and an exchange of other defaulted debt.

BTA’s $2.1 billion bond due 2018 has also got a boost from a better-than-expected restructuring deal for creditors, rising 25 cents on the dollar in the last month.

Many frontier market sovereign borrowers have issued Eurobonds this year to take advantage of investor demand due to low interest rates in the developed world.  The latest was Bolivia, South America’s poorest nation, which on Monday returned to global bond markets for the first time in nearly a century.

Clearing these debts will also make it easier for Ivory Coast and Kazakh borrowers to issue debt on international markets.

As Kazakhstan’s deputy prime minister Kairat Kelimbetov told Reuters last week:

The BTA story will soon be over and next year we, the government of Kazakhstan, will consider issuing bonds…Even though we have a deficit of less than 2 percent of GDP, we must come back to the market to establish a benchmark.

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