“Let’s speculate on North Korean debt!”
Thursday, March 11th, 2010According to Businessweek:
BNP Paribas SA, France’s biggest bank, in 1997 created bonds denominated in Deutsche marks and Swiss francs secured on non-performing loans owed by the Foreign Trade Bank of the Democratic People’s Republic of Korea. The notes mature today, and Exotix plans to issue new ones with about a 10-year tenor.
“There are very few investments left in the world like this,” Andrew Chappell, head of London emerging market fixed- income for Exotix, a broker specializing in distressed securities, said in a telephone interview. “The North Korean bonds are very cheap,” they may rise on signs of improved international relations and they are easier to trade than the underlying loans, he said.
President Kim Il Sung drove North Korea to become the first communist nation to default 34 years ago by spending almost a third of gross domestic product on its military. The United Nations toughened sanctions on son Kim Jong Il’s government after it detonated a second nuclear device in May, deepening an economic crisis that forced North Korea to revalue its currency in November by removing two zeros from the face value of the won.
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“Investors have good reason to hold the notes even by extending them,” said Dong Yong Sueng, a senior fellow in the economic security team at the Samsung Economic Research Institute in Seoul. “They hope that the South Korean government may take over North Korean debts and repay them if the communist state collapses or the regime changes.”About 320 million marks and 240 million francs ($225 million) of the zero-coupon 1997 bonds are outstanding, according to data compiled by Bloomberg. Exotix last quoted them at 12.75 percent of par value as of March 8 from 11.5 percent a month earlier and 33 percent in December 2007.
While prices that low may be attractive to investors willing to take a five- or 10-year bet, “there are just so many better opportunities for investing in high-risk assets,” Richard Segal, director of emerging markets fixed-income at Knight Libertas Ltd., said in a phone interview from London.
“I don’t see much value in the notes even at 10 or 11 percent of par because I see no willingness of North Korea to reschedule the underlying loans and no willingness of South Korea to pay them off short of unification,” he said. That’s “unlikely for a long time.”
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North Korea is overhauling its legal system in a bid to attract as much as $400 billion in foreign investment over the next decade, almost 20 times current GDP, South Korea’s MBC television reported on March 4.
Read the full story here:
North Korea bonds due today spur exotix bet on political change
Businessweek
Jungmin Hong
3/11/2010