Argentina and Lebanon are Broke, so let’s Lend to Angola

Jonathan Rochford

Narrow Road Capital

The travails of Argentina are well known, they’ve defaulted on their debt yet again with bondholders now fretting over how big a haircut the country will try to impose on them. Less well known is Lebanon, its government debt to GDP ratio of 152% sees it rank behind only Japan and Greece on that measure. That ratio alone has had the country on the watchlist of lenders for a long time, but this year things have deteriorated for the nation of 6.1 million people. A slowdown in remittances from citizens living abroad, the wave of refugees from Syria and the hangover from a debt binge have combined to place the country in an almost impossible financial position.

As reserves dwindled a bank run started with the government forcing banks to close for two weeks in order to stem withdrawals. Once banks reopened citizens turned up demanding full withdrawals, some armed with guns and unwilling to take no for an answer. Not surprisingly, demand has dried up to buy Lebanon’s bonds, pushing yields up to levels in line with Argentina, as the graph below from Bloomberg shows. Whilst Lebanon hasn’t yet defaulted, it is almost certain to do so in the near term.

You can add Ecuador to the list of problematic emerging market borrowers, its bond yields have also spiked after citizens and parliamentarians revolted against austerity measures required as part of its February 2019 IMF bailout. 

Despite the issues with Argentina, Ecuador and Lebanon, Angola was able to attract $8 billion of orders for 10 and 30 year bonds this week. It ended up selling $3 billion of bonds, paying 8% on the 10 year bonds and 9.125% on the 30 year bonds. Angola is another IMF bailout recipient, and like Ecuador it has a heavy reliance on oil exports. 

S&P has it at B-/negative outlook and Moody’s at B3/stable outlook. That rating puts it in true junk bond territory; borrowers who S&P refers to as the "weakest links". Angola is seen by optimists as a turnaround story with solid growth potential. Time will tell whether bond buyers have fallen for the same old snake oil or if this time really is different for another weak emerging market borrower. 

Jonathan Rochford
Portfolio Manager
Narrow Road Capital

Narrow Road Capital is a credit manager with a track record of higher returns and lower fees on Australian credit investments. Clients include institutions, not for profits and family offices.

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