LONDON: A global economic recovery and extensive support for emerging markets from multilateral lenders have driven up distressed debt prices, making the market more attractive for emerging sovereign borrowers to restructure debt.

The recovery has fed into a stronger performance across the board for emerging markets, while tight monetary conditions worldwide have once more pushed investors towards higher yield.

This is benefiting countries such as Argentina which are looking to restructure defaulted debt and issue new debt.

‘The combination of market sentiment having improved and global interest rates being low are such that it is a very good time to restructure,’ said Richard Segal, analyst at Knight Libertas.

Distressed debt often refers to debt on which the borrower has already defaulted. It is traded on the expectation that a restructuring deal will be reached.

Argentina and Ivory Coast have signalled restructuring deals of defaulted debt this year, and the normally thinly traded debt has risen sharply in expectation of the deals.

Argentina’s bonds are trading at around 38 cents on the dollar, compared with 8 cents a few months ago.

Ivory Coast debt is trading at around 50 cents, compared with 25 cents in May and 17 in February.

In addition, high-risk sovereigns from Iraq to Ukraine are also considered distressed debt, typically defined as having yield spreads of at least 1,000 basis points over US Treasuries.

‘Emerging markets and restructured or low-rated credits have all performed quite strongly, on the back of stabilisation of the global economy,’ said Stuart Culverhouse, chief economist at frontier markets brokerage Exotix.

‘Strong implicit and explicit support from the IMF has lifted the whole asset class.’

G20 leaders agreed a $1.1 trillion boost for the International Monetary Fund at their London summit in April.

This included the injection of $250 billion in special drawing rights, the IMF’s internal unit of account, to all members’ foreign exchange reserves.

Yield search

JPMorgan’s EMBI+ index of more liquid emerging sovereign bonds yields around 320 basis points over US Treasuries, compared with 900 bps in Oct 2008, at the height of the crisis.

Narrower yield spreads are encouraging emerging sovereigns to restructure or issue debt as they will have lower debt servicing costs.

BoA Merrill Lynch is overweight Argentina and Ivory Coast in its sovereign hard currency debt portfolio, indicating it expects prices of these countries’ bonds to rise further.

Poor domestic economic conditions have also encouraged countries like Argentina to seek to restructure their debt.

Argentina is looking to restructure $20 billion of outstanding debt plus accrued interest payments, and issue a new $1 billion bond.

‘When times are good, governments do not need to borrow,’ said a London-based fund manager who holds Argentinian debt.

‘When times are tough, they need to access the markets.

That’s the case with Argentina.’ Economy minister Amado Boudou has said investors will have to take losses of at least 65 per cent to enter a new debt swap, and he would be happy with a 60 per cent acceptance rate.

However, prices of the defaulted bonds have held up even in shakier markets of the past week.— Reuters