Distressed traders see bright spots in riskiest emerging market debt
Only a tiny portion of distressed sovereign bonds from non-defaulted emerging markets are scheduled to mature next year, according to data compiled by Bloomberg. That gives money managers the chance to cash in on the high-yielding notes, with relatively few looming 2023 principal payments to worry about.
“There are plenty of non-defaulted sovereigns with highly elevated spreads, yet few of these sovereigns with elevated spreads face funding cliffs in 2023,” said Gabriel Sterne, head of global emerging-markets research at Oxford Economics. “The discerning investor may be able to profit from some hefty coupons before default occurs.”
While coupon payments can also ramp up default risk for a country in crisis, the calendar is thin for larger principal obligations.
El Salvador is just weeks away from a $604-million bond maturity, and Ghana has already announced plans for a restructuring that could change the picture for a $149-million bond due in August. Tunisia, which recently struck a deal with the International Monetary Fund, is on the hook to pay holders of a $500-million note in October.
All together, there’s only about $1.3-billion in principal of the high-risk debt due next year – a small part of the roughly $118-billion in total sovereign bonds from non-defaulted emerging markets that yield an average of at least 10 percentage points more than US Treasuries, according to data compiled by Bloomberg.
That leaves Wall Street to focus on its bullish expectation that peaks in global inflation and major central-bank policy rates next year trigger a comeback after 2022’s record-setting losses. A key Bloomberg gauge of emerging-market sovereign dollar bonds plunged almost 16% this year, on course for its worst annual loss since records began two decades ago.
Such depressed bond prices can carry potential for investors who expect governments to manage their debt loads – or at least come up with attractive restructuring conditions.
“Distressed countries present interesting opportunities,” according to Gustavo Medeiros, a money manager at Ashmore Group Plc in London. The average recovery value on sovereign debt restructurings is about 59 cents on the dollar, while nations rated C or lower tend to trade at an average of 30 cents or less, he wrote in a note.
Recovery values are core to discussions among holders of defaulted bonds from Sri Lanka and Zambia, who are already looking to negotiate with government ...