Global Investing

Belize’s so-called superbond has not proved to be a super investment proposition.

The country has set out proposals on how it might restructure the bond, which bundled together several old debts (hence its name) and the ideas have been greeted with horror by investors. Essentially, the government wants to reduce the principal of the bond by almost half while extending the maturity by 13 years, according to one of the proposals.  Interest rates on the issue, at 8.5 percent this year, could be cut to a flat 3.5 percent. Or investors could accept a 1 percent rate that steps up to 4 percent after 2019.

Markets had been expecting a restructuring ever since Prime Minister Dean Barrow said in February the country could not afford to keep up debt repayments. The bond duly fell after his comments but picked up a bit in recent months after Barrow assured investors the restructuring would be amicable.  Investors holding the bond are now nursing year-to-date losses of 24 percent, according to JP Morgan.

There’s worse. If the government sticks to its original proposals, says Stuart Culverhouse, head of research at brokerage Exotix, the principal of the bond, currently at $544 million, could fall under $500 million. That will push it out of the main bond benchmark for emerging markets, JP Morgan’s EMBI Global, and would trigger automatic selling by funds benchmarked to the index.  Culverhouse predicts that the bond, now trading at 42 cents on the dollar, will fall eventually to the low-20s. It started the year just over 60 cents.

JP Morgan which had been advising an overweight position on Belize relative to the EMBIG index, cut its recommendation to marketweight on Thursday. It tells clients:

Who would have thought it. As fears over the euro zone’s fate, Chinese economic growth and Middle Eastern politics drive investors toward safe-haven U.S. and German bonds, some have apparently been going the other way.  According to JPMorgan, bonds from so-called frontier economies such as Pakistan, Belarus and Jordan (usually considered high-risk assets) have performed exceptionally well, doing far better in fact than their peers from mainstream emerging markets.  The following graphic from JPM which runs the NEXGEM sub-index of frontier debt, shows that returns on many of these bonds are running well into the double digits.

NEXGEM returns of 8.4 percent  are on par with the S&P 500, writes JPMorgan and outstrip all other emerging bond categories. Clearly one reason is the lack of correlation with the mainstream asset classes, many of which have been selling off for weeks amid growth fears and in the run up to French and Greek elections.  Second, investors who tend to buy these bonds usually have a pretty high risk-tolerance anyway as they keep their eyes on the double-digit yields they offer.

So year-to-date returns on Ivory Coast’s defaulted debt are running at over 40 percent on hopes that the country will resume payments on its $2.3 billion bond after June. The underperformer is Belize whose bonds suffered from a default scare at the start of the year.

One has already defaulted on its debt and the other is at risk of doing so, but Ivory Coast bonds are wildly outperforming those of Belize in JPMorgan’s new NEXGEM frontier bond index.

The index contains the debt of 18 frontier markets, and Ivory Coast was the best performing in January, after the borrower said at a roadshow in London last month that it hoped to resume making coupon payments on its debt this year.

Ivory Coast stopped paying coupons on its debt in Jan 2011, when it was in the throes of unrest following a disputed presidential election. But the only way is up, now, it seems, for the $2.3 billion bond, which has made returns of 21 percent in January, according to JPMorgan.