Venezuela's 20-Cent Bonds Are One Hedge Fund's Emerging-Market PickBy
North Asset Management sees only upside for beaten-up notes
Bonds could double if opposition gains edge, Kisler says
Peter Kisler says one of the best bets in emerging-market debt is a country racked by quadruple-digit inflation, a plunging currency, punishing sanctions and months of overdue payments.
In a world of stretched valuations -- even after this week’s selloff -- the hedge-fund manager at North Asset Management favors some of the world’s lowliest bonds, debt from Venezuela and its state oil company. His thinking is that with some notes trading as low as 20 cents on the dollar and many of them in default, they have nowhere to go but up.
It’s an opinion he shares with the likes of Morgan Stanley, Nomura Securities International Inc. and Stifel Nicolaus & Co., who’ve argued that the bonds could produce a windfall when President Nicolas Maduro is finally pushed out and a new administration comes to a restructuring agreement with creditors. The change could come as soon as the presidential election the government set for April, but even if the opposition can’t gather enough momentum for a victory, Kisler thinks it’s only a matter of time before Maduro departs.
“If Maduro ever goes, these bonds could double or go even higher,” the money manager said from London, where he helps oversee about $300 million of assets. “The chances are he will win, but there’s still potential for surprise.”
Maduro’s ouster would definitely be a surprise to most Venezuela observers, who say that the president’s moves to bar his most prominent rivals from running and his stranglehold on local media make a defeat at the ballot box unlikely. He hasn’t suffered politically after defaulting on several bonds last year amid plunging oil exports, a shortage of foreign currency and sanctions that make it difficult to transfer money through the U.S.
North Asset Management has posted an average annual return of 9 percent since its start in 2011, but returned just 3.3 percent net of fees in 2017 as it bet against most emerging-market debt. That was a mistake, but Kisler said he expects the strategy to pay off this year as developing-nation sovereign spreads near all-time lows, debt levels increase and volatility climbs ahead of a heavy slate of elections.
Venezuela isn’t like most countries, however, and its bonds have returned a world-leading 15 percent this year amid optimism that some combination of higher oil prices, an upset electoral win or a loosening of sanctions by the Trump administration will allow Maduro’s government to honor its debt or, at the very least, embark on a restructuring. As of now, the sanctions prohibit U.S. institutions from buying new Venezuelan debt, making it virtually impossible for the government to swap existing debt for longer-maturity notes.
Here’s what else Kisler had to say about Venezuela and emerging markets:
Why is Venezuela more attractive than other high-yield names?
“If you compare it to Mozambique, which has been in default for a year with no resolution and bonds trading at 80 cents, the strategy of buying and waiting on Venezuelan bonds just below 20 cents is not the worst trade you can do.”
What are your favorite Venezuelan bonds?
“Initially PDVSA bonds were trading higher, and I preferred the sovereign. Now, it’s the opposite. The trade right now is to buy the cheapest bond on the curve, which is now the PDVSA bonds trading below 20. It’s very difficult to predict what will have a higher recovery value in the end, so the best strategy is to buy the one with the least downside.”
Which other credits offer decent upside?
“Well, that’s the problem. A country like Argentina, Argentina local debt has a fantastic yield above 20% in some cases, but we had some exposure which we recently closed due to the volatility. When and if volatility subsides or in the case of external debt, prices correct, then it’s also on the shopping list.”
Did the mini-market blowup create value opportunities?
“Emerging-market equities can definitely rally. Equity markets have sold off quite a bit and once things subside, they can bounce back. The correction now -- there’s no panic, no contagion to emerging markets. Still, I don’t think this is a significant enough dip to buy EM.”
“For EM fixed income, fair value would be closer to where we were trading a year ago. Everything taken into account, the average correction could be about 5 to 7% for a typical emerging-market dollar bond.”