El Salvador dollar denomination notes due in 2050 fell 2.2 cents to 64.4 cents on the US dollar on Monday, their lowest ever. The Central American country’s debt was among the world’s worst performers on Monday as investors considered whether President Nayb Bukele’s plan to sell sovereign bitcoin bonds closes the door on a deal with the International Monetary Fund.
El Salvador’s progress with the IMF has soured since May, when Bukele’s party took over the assembly and fired five top judges and the attorney general. His policies, including the adoption of bitcoin as legal tender, have been repeatedly criticized by the multilateral lender.
“This announcement cements the path of the ‘IMF’,” said Nathalie Marschick, managing director of Stifel Nichols & Co. Bonds are falling “as the market undercuts the potential recovery value on the unpredictability of policies.”
With the country’s debt trading in troubled territory, investors are now seeking 1,168 basis points in additional yield to hold El Salvador dollar bonds on the US Treasury, according to data from JPMorgan Chase & Co. While the plan to sell new, tokenized bonds may offer some relief to the government, it also adds uncertainties and potential risks.
For Siobhan Morden, head of Latin America fixed income strategy at Amherst Pierpont Securities, the announcement of a bitcoin bond is a sign that the nation is doubling down on its own funding and growth.
“Innovative financing is not a solution in itself,” she wrote in a note on Monday.
The country’s next major payment to external creditors is not due until January 2023. The $1 billion in tokenized bonds could bring relief to the government, as negotiations for a $1.3 billion loan with the IMF have been downgraded to the annual Article IV review, according to the lender.
According to Samson Mo, chief strategy officer at Blockstream Corp., the proposed 10-year tokenized bitcoin bond is expected to pay 6.5% annually, with an additional dividend of 50% of any bitcoin gains, allowing El Salvador to recoup its original investment. have received the declaration. Plan on stage with Bukele during a bitcoin conference. Those dividends would be paid in either dollars or the cryptocurrency Tether, a so-called stablecoin meant to be a dollar proxy, he said.
As soon as the law allows for new bonds, the nation will issue a prospectus, Mo said. For now, the biggest challenge is how little is known.
For the bitcoin crowd, this could be a more risk-averse bet, said Carlos de Sousa, portfolio manager at Vontobel Asset Management in Zurich. A plan to pay a 50% dividend if the price of the crypto currency rises may sound tempting if investors aren’t penalized for any bitcoin dilution — but it’s too soon to know without the prospectus, he said. said.
“If you have a lot of money on bitcoin and you want to hedge the risk, this tool, conditional that you can only share profits and not losses, gives you 25% upside but no bitcoin downside, Certainly, about El Salvador’s default risk on price,” he said. “But since this is for retail investors, maybe sovereign default risk is not something they are focusing on.”
And there’s a chance the bond could win over the pocket of investments on Wall Street.
“Institutional investors tend to overlook certain risks as long as they meet their goals for returns,” said Luis Gonzalli, co-head of investment at Franklin Templeton Mexico. “I can’t buy bitcoin, but I can buy junk.” It is a way to get the mandate in their fund. Technically, you’re not buying bitcoin, just junk.”
Still, the note would mark a new way for governments to borrow externally and could bring more retail investors into the emerging-market lending space.
“The money will come,” Mo said during an interview on Bloomberg television when asked whether institutional investors would be prohibited from buying securities. Mo said he has already spoken to a potential buyer who wanted to buy as much as $20 million from the problem.
Jared Lu, a money manager at William Blair in New York, said a 6.5% coupon would not be enough to offset the risks associated with El Salvador, assuming the bond’s price is at or close to that.
“This seems like a desperate move, showing that Bukele is moving away from Western institutions,” Lu said. Existing bonds will continue to make new lows, but “the market is a bit broken now.”
This story has been published without modification in text from a wire agency feed.
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