(Bloomberg) – A leading emerging-markets fund manager who made gains with restructured Ecuador bonds is now waiting for Sri Lanka to default to take on the national debt.
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Carlos de Sousa, who oversees a $3.8 billion bond fund for developing countries at Vontobel Asset Management in Zurich, expects the South Asian country to run out of money to pay its debt creditors. mid-year here, even after the central bank pledged to meet this month’s obligations. . The Venezuelan-born investor already owns the bonds and is waiting for a default sale to buy more, betting that the average salvage value of the notes could exceed current prices.
Most of Sri Lanka’s external bonds have lost around 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 hammered the tourism industry, which accounts for around 5% of the economy, while prolonged lockdowns have hurt trade and industry. The island nation is now considering a bailout from the International Monetary Fund.
“Bonds are so cheap that the salvage value is higher than today’s prices,” de Sousa said. “The probability of default is greater than 50%.”
Sri Lanka has $15 billion in external bonds outstanding, with the next principal payment due on January 18. On Wednesday, the central bank governor tweeted that $500 million had been set aside to reimburse holders that day. In July, the nation has another principal payment of $1 billion.
On Sunday, Sri Lanka asked China to consider restructuring the country’s debt repayments during a visit by Foreign Minister Wang Yi. The country’s central bank reduced its gold holdings last month to boost liquidity in its foreign exchange reserves which were at a 12-year low in November.
The South Asian nation’s dollar bonds fell on Monday. Notes maturing in March 2030 were 1 cent lower at 48.8 cents to the dollar while debt maturing in July 2022 fell 1 cent to 71.9 cents.
Vontobel’s emerging markets debt fund, which de Sousa helped oversee with Luc D’Hooge since the start of last year, has beaten 93% of its peers over 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 gains to a bet on Ecuadorian bonds ahead of April’s presidential election. A former banker’s surprise victory spurred a 20-cent rise in banknotes within days, making it one of the best performers in the developing world just a year after the country restructured $17.4 billion of international debt. Vontobel’s fund held about 2.5% of its Ecuadorian bond holdings in August, according to a company filing.
Bets on a rebound in Colombian bonds after the nation was downgraded to junk and a position in Angolan debt, which also posted double-digit returns last year, also contributed to this performance, de Sousa said. .
Other frontier market bonds rewarded investors with outstanding returns last year. Zambian bonds soared more than 30 cents in the week following the election of a market-friendly president, offering creditors yields approaching 50%. In Belize, a debt restructuring generated double-digit gains for creditors.
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For this year, de Sousa’s most compelling trades include overweight positions in Argentina and Tunisia, where he expects IMF deals to materialize in 2022. He also picked up Bahamian bonds, a country which he says is too rich to have a double. -digit yield, as well as GDP warrants from Ukraine, dollar bonds from Petroleos Mexicanos, Egyptian debt and euro-denominated notes from Ivory Coast.
(Updates with details of Sri Lanka’s gold holdings and bond prices in the sixth and seventh paragraphs. A previous version of the story corrected the bond maturity in the fifth paragraph.)
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