I write today in order to give the government of Kenya some credit for creativity in the face of adversity. This week a key bond rating agency, Fitch, downgraded the sovereign bonds of Kenya, from B to B-. As influential rating agencies go, Fitch is on a par with Moody's on the one hand and Standard & Poor's on the other. As it happens, Moody.s downgraded Kenya earlier this year. The S&P may announce a grading change on August 23d. The change from B to B- is not a plunge into "junk bond" territory. What are, sometimes unfairly, called junk bonds are more generously called "speculative bonds" in contrast to the widows-and-orphans are safe with these ("investment grade") bonds. The line between investment and speculation is, on the Moody's system, the line between triple B and double B. Accordingly, Kenya as a single B country, was already in junk bond terrain. The addition of a minus sign is an incremental indication of greater odds of...
Posts
One of the purposes of the severe economic sanctions is to make it impossible for Russia to make the interest payments on their outstanding bonds. Once they default, presumably, their ability to borrow dries up quite quickly, and they'd have no source of funding to continue a long war. I am in sympathy with that design, and would love to see such a default. Unfortunately, I cannot report it yet. Russian sovereign bond payment received by JPMorgan and processed -source | Reuters
Some politics, some finance, and yes some philosophy here. Would you buy a bond for your portfolio that had been issued by the Spanish province of Catalonia? Would you do so in the expectation that the local government, which issued the bond and which now considers itself to be the leadership of a sovereign state, would be ready, willing, and able to continue to make payments? Or, in the expectation that Spain, which has now asserted direct control of the province, would be making the payments? The worry, of course, is that neither will happen -- that the situation will continue to be unsettled, that the government in Madrid won't make these payments as a way of undermining the legitimacy of the folks who issued these bonds, that those folks won't be able to make payments either, and thus that the buyers will be left holding the bag. The website CREDIT SLIPS has noticed something odd about these bonds: http://www.creditslips.org/creditslips/2017/10/catalan-bonds-anyon...
As Anna Gelpern observes on The Credit Slips blog, there is no real political support for an international bankruptcy court for sovereigns. What less daunting solutions might there be? The obvious one is that bond-issuing sovereigns can change the language of their issuing documents. Couldn't they simply stop using the pari passu language that the holdouts have been employing in the New York courts? Well, yes, although something more than simply deleting that Latin phrase will be necessary. Fortunately, some very bright legal minds have given a lot of thought to the draftsmanship involved. Most bonds issued by sovereigns nowadays have collective action clauses. These explicitly allow for a restructuring in which some supermajority of the creditors can vote to accept a "haircut," as it is called, and holdouts will then be stuck receiving the same payments with the same haircut, too. Without a CAC, the situation is as if a drive-in movie theatre were proh...
That graph comes from nine years ago, a Brad DeLong post on Argentina's interest rate spreads from four to six years before that. It's a neat reminder of how long the controversy over these bonds has been simmering along. Here is the recent Supreme Court decision on the litigation/discovery question. slip opinion Noah Freeman, of Bloomberg, offers his opinion that the near-simultaneous decision of the Supreme Court to refuse to hear opinions on the merits of the lower court orders is "legally surprising, financially worrisome, and internationally questionable." Lyle Denniston of SCOTUSblog has this to say: No relief for Argentina. JURIST of the Un. of Pittsburgh School of Law, offered a simple two-paragraph statement. THE NEW YORK TIMES goes further, emphasizing for example the Republic of Argentina's statements that it would :"try to comply but that another default would be a possibility given the overall sums at stake for all...
Argentina isn't having any luck at all in the U.S. courts of late. On June 17th, the Supreme Court upheld a discovery order, that will make life easier for holdout bondholder NML as it searches the world for attachable Argentine assets. The money quote is as follows: “The prospect that NML’s general request for information about Argentina’s worldwide assets may turn up information about property that Argentina regards as immune does not mean that NML cannot pursue discovery of it.” Meanwhile, the court denied review of two other cases that went to the issue of interpreting the language of the issuing documents, the pari passu clause. Here is coverage from the fine folks at SCOTUSblog . The gist of it is that the New York district court, which has been working very hard to make it impossible for Argentina to distribute money with any assistance from US based financial institutions unless the holdout creditors share in those disbursements, has gotten its way. ...