Latin Debt: Bad Rap, Great Pricesby
Jean-Marie Eveillard is going where few fund managers dare to tread: The president and portfolio manager of more than $2 billion in assets at Societe Generale Asset Management Corp. is tiptoeing into Latin American debt. With yields on some debt issues as high as 30%, "one is being paid very nicely indeed for bearing the risk that some South American countries will default on their external debt for the second time in only a few years," says Eveillard.
Eveillard is taking advantage of the guilt by association that many Latin American countries are now suffering. Countries such as Argentina and Brazil are finding that the economic turmoil in Mexico has caused prices on much of their debt issues to plunge as lenders and investors grow wary. Eveillard says that at current prices, he is being well rewarded for taking risks. James Swanson, portfolio manager of the $784 million closed-end MFS Multimarket Income Trust at Massachusetts Financial Services, agrees, comparing the market to the "tremendous values" that investors found in the junk-bond market of 1990 and 1991. At current prices, many Latin American debt issues trade at barely 50 cents on the dollar.
"CHICKEN." The most popular investment is in so-called Brady bonds. These dollar-denominated bonds are a product of the Latin American debt crisis of the early 1980s. Rather than have U.S. and other foreign banks experience massive defaults on the sovereign debt of less developed countries, much of the debt was restructured into fixed-rate, longer-term bonds with principal backed by zero-coupon U.S. Treasuries. Not all Brady bonds are collateralized, however. Some are floating-rate, shorter-term bonds with yields up to 22%. Eveillard invests in both types: "I'm chicken," he says.
Argentine debt is the favorite of many fund managers looking to test the Latin American waters. The country has "one of the most conservative and disciplined monetary systems one can think of," says Eveillard. It is also not as reliant as Mexico on short-term refinancing in the foreign markets and does not have the same current-account deficit problems. Swanson, who has sunk about $50 million into Latin American debt in the last three weeks, recently bought the 8% Eurobonds of Argentine oil company YPF. "It takes its revenue in dollars, so even if Argentina gets into trouble, there's no reason to think that YPF will," he says.
Debt with a Brazilian flavor is the favorite of Steven Merrell, a fund manager at American Express Financial Corp. Merrell, who manages the $1.5 billion IDS Special Income Fund, says the country has been unfairly penalized by the devaluation of the Mexican peso. "After Dec. 21, when these bonds got beat up, we increased our weighting significantly," he says. He invests in Brady bonds in Brazil because the Brazilian corporate debt that he likes isn't liquid enough. Merrell has about 4.5% of his fund in Latin American debt.
Perhaps the highest yields can be found in Venezuela. But along with its 30% yields comes higher risk. Eveillard likes Venezuela "a little bit" because even though he feels the government has made many mistakes, Venezuela is a member of OPEC, and he's positive on the price of oil.
PESO PLAYS. Even Mexican debt is getting some nibbles: Mark Twain Bank Inc., a $2.5 billion St. Louis bank that caters to high-net-worth individuals, sees interest in the Mexican treasury-bill market. "The most activity has been in the one-year maturities, because with yields of 47%, people want to lock these in," says Neil George, assistant vice-president for international markets at the bank. Investors have to invest $25,000 to make such a direct bet.
Buying into mutual funds is a simpler way into the market. Swanson bought more Mexican Brady bonds when President Clinton announced his bailout plan for Mexico and has been averaging into the market over the last three weeks. Merrell also bought into a Yankee bond recently--a bond issued in the U.S., in dollars, by a foreign issuer. He bought a chunk of a United Mexican States Yankee, a 10-year bond issued by the Mexican government that yields around 16%. "Some corporates will default," he says. "But the country itself won't."
Fund managers aren't betting the farm. Eveillard has $100 million, or 4% to 5%, of his funds in Brady bonds. His foray into the debt "is not without trepidation," he says. "But risk is not just a matter of the instrument you buy but of the price you pay." And he and other pros think the price is right.