Credit markets are crazy, from US buyouts, to frontier market bond offerings.
Buffett released the annual Berkshire letter this past weekend, and it contained a number of gems as usual, although it was shorter than the typical letter.
Petition’s excellent distressed credit focused newsletter last week pointed out that Buffett’s concerns about high M&A prices were:
affirmation of a number of macro themes that ought to portend well for distressed players in a few years: (i) excess capital supply, (ii) resultant inflated asset values, (iii) lack of discipline, and (iv) over-leverage.
The big dam indicator
The loose credit has spread to frontier market bond offerings as well. Tajikistan, a country with $7 billion in annual GDP in September raised $500 million of debt at 7.125% for 10 years. Tajikistan had no problem raising this capital. In fact funds put in $4 billion in bids for the $500 million in paper. Tajikistan will use this capital used for the Rogun barrage project, which involves building the world’s largest hydroelectic dams. Building large buildings tends to correlate with hubris, and bubbles(although the empirical evidence around causality is loose), as many have noted:
More frontier market fun
No Economy is too small, no political crisis is too dire, and no country is too bankrupt for a solo operator like me to find riches among the ruins.
Riches Among the Ruins: Adventures in the Dark Corners of the Global Economy is an incredibly entertaining bottom up look at frontier market crises over the last 3 decades from the perspective of a travelling distressed debt trader. Each chapter is dedicated to Robert Smith’s experience in a particular country: El Salvador, Turkey, Russia, Nigeria, Iraq, etc, etc. Each country is unique, but Smith’s weaves several key lessons throughout his memoir.
Anyone who seeks profits in inefficient markets could benefit from Smith’s experience.
Information vacuums are key for middleman and arbitrageurs
In the mid 1980s no one had any idea what an El Salvador bond was worth- which is to say, they had no idea what value others might attach to it. The ignorance, this information vacuum, was my bliss. The seller’s price was simply a measure of how desperately he wanted to dispose of a paper promise of the government of El Salvador, and the buyer’s measure of how eager he was to convert his local currency into a glimmer of hope and seeing dollars down the road. The spread, my profit, was the difference between the two. In a fledgling market, with no reporting mechanisms and precious little information floating around, the spread can be enormous, and there was no regulatory or legal restrictions on how much you could make on a transaction.
Though my sellers and buyers, usually the representative of foreign companies doing business in El Salvador, often knew each other , played golf together, or broke bread together at American Chamber of Commerce breakfasts, I knew it would take some time before they eventually started to compare notes. At the beginning I doubt any of them even mentioned they were trying to sell or buy El Salvador bonds because the market didn’t exist yet. But until the market matured it was a gold rush, and I developed a monopoly on that most precious of all commodities in any market: information. I found out who wanted to sell, who wanted to buy and their price, and I held that information very tight to the vest.
In some cases buyers and sellers were on different floors in the same office building, or different divisions of the same global corporation. The biggest challenges for foreign companies doing business in the developing world was converting local currency revenues back into dollars. One way to get money out was to buy dollar bonds at fixed exchange rate and over time collect principal and interest in dollars.
Creativity and information edge: Struggles over bondholder lists
In almost every country, Smith, goes through difficulty to get the list of people holding the bonds in which he was seeking to make a market. Arbitrageurs and brokers who had access to the list guarded it aggressively, because it gave them an edge in acquiring positions at a discount, or profiting as a middleman. This was a key bit of information, available from connections at the Central Bank or other places.