Distressed-Debt Club Thins as Rally Pulls Nations From Brink
The bond rally in emerging markets is rehabilitating some of the riskiest borrowers.
The total number of developing nations whose dollar debt trades at a 1,000 basis-point premium to U.S. Treasuries -- the threshold at which the bonds enter distressed territory -- halved in May.
El Salvador and Iraq left the group, and six African nations -- Gabon, Ghana, Nigeria, Ethiopia, Tunisia and Cameroon -- also departed as spreads narrowed. Ecuador dropped out after it reached an agreement to delay coupon payments while it seeks IMF funding. Mozambique and the Bahamas joined the list.
The premium sought by investors to hold emerging-market sovereign debt over U.S. Treasuries has dropped more than 300 basis points month-to-date. That’s handed investors an almost 6% gain, on track for the best monthly performance in nearly a decade.
The rally may open up funding for a broader group of emerging markets, some of which may have been weighing whether to join a global initiative to suspend debt payments. Official creditors moved fast to provide relief, but private investors, including Eurobond holders, have proved more reluctant.
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Egypt raised $5 billion in its largest-ever bond sale in international markets earlier this month, underscoring the extent to which risk appetite has returned. Romania, Serbia and Bahrain also sold bonds, lifting total Eurobond placements by 30% to $96 billion in May.
The distressed-debt club now comprises eight governments, including Zambia and Tajikistan. Argentina defaulted on its debt for the ninth time this month and Lebanon was already in default or restructuring talks with investors before the Covid-19 pandemic erupted.
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