| NEW YORK, June 17
NEW YORK, June 17 The world has changed since
veteran distressed-sovereign debt trader Robert Smith was
hawking millions of dollars in bearer bonds from a briefcase in
El Salvador. But he hasn't lost his appetite for more esoteric,
risky debt investments.
Smith's Turan Corporation is planning to launch a new $500
million fund in the fall, and investors in the fund shouldn't
be surprised to find debt from the likes of Iraq and Ecuador
among its holdings.
Smith traded debt in emerging markets before globalized
electronic trading brought transparency -- and with it a
narrowing of spreads. His experiences, which include being
shaken out of bed by a bomb in San Salvador, are recounted in
his new book, Riches Among the Ruins: Adventures in the Dark
Corners of the Global Economy.
Technology has changed things a bit. But Smith's latest
picks include bonds issued by war-torn Iraq as well as Ecuador,
a country currently in default.
Turan Corporation has been active in trading restructured
Iraqi debt after the U.S.-led takeover of the country in 2003.
"One of the most interesting investment assets right now
are Iraqi bonds," said Smith in a recent interview. "I'm not
saying that the U.S. government has silently given full faith
and credit, but (it is) an economy that exports 3 million
barrels (of oil) a day and (has) some semblance of political
After the U.S. invasion in 2003, Iraq restructured
commercial claims and launched $2.7 billion worth of sovereign
bonds in January 2006. The bonds mature in 2028 but start to
pay back the principal from 2020. The issue currently trades
with a yield of around 9.6 percent 462652AA6=RRPS.
Ecuador is another interesting case fraught with risk. The
country recently defaulted on $3.2 billion of its 2012 and 2030
global bonds, which it said were issued under illegitimate
Smith said he likes those bonds maturing in 2015
ECUGLB15=RR, which he expects the government to pay to retain
some semblance of credibility. The amount outstanding comes to
about $650 million.
The government in Ecuador offered to buy back disputed bonds
maturing in 2012 and 2030 at 35 cents on the dollar. However,
the price of the 2015 bonds has jumped to 69 cents from less
than 46 cents to the dollar in the past three weeks. The bonds
currently have a yield of around 17 percent.
"The (issue) due in 2015 they could not negate because when
it was issued (Rafael) Correa, who is now the president, was
minister of finance," said Smith.
"I think they will definitely pay this bond issue. I'm not
fooling myself as to the honesty of these people, but I'm
simply saying that Correa's credibility is on the line."
Emerging market assets were hit hard during the financial
crisis. In the wake of the Lehman Brothers bankruptcy, emerging
market spreads shot up to over 800 basis points above U.S.
Treasuries. The JPMorgan index was lately 437 basis points
above Treasuries, compared with early 2007, when they traded at
less than 200 basis points above Treasuries.
Money is starting to flow back into emerging markets assets
as investors feel more comfortable with the increased risk
associated with those assets.
Yield spreads between emerging market bonds and U.S.
Treasuries, a key measure of risk aversion, have tightened more
than 200 basis points since March, according to the JPMorgan
EMBI+ index 11EMJ.
However, Smith believes markets still have further to run
despite rallying earlier this year. "You always worry about
missing some of the ride, but we hope to catch 60 to 70 percent
of the upside," he said.
Turan has run two similar funds in the past. The last was
liquidated in 2007 with a return of 165 percent between 2003
and 2007. "We liquidated in 2007 because we thought it was
getting toppy -- in retrospect we were right," said Smith.
(Editing by Kenneth Barry)