Home' Trinidad and Tobago Guardian : June 4th 2015 Contents BG18 INTERNATIONAL
BUSINESS GUARDIAN www.guardian.co.tt JUNE 2015 • WEEK ONE
For the hedge funds and
money managers that pick
over the credit market s
scrap heaps, Puerto Rico
has become the new
Some of the same distressed-debt buyers
that started battling seven years ago over
the remains of Lehman Brothers Holdings
Inc are now girding for a rematch over the
US territory s US$72 billion of debt. That s
likely to pit investors such as Fir Tree Part-
ners---among firms that snapped up US$4.5
billion of bonds the island has to pay before
other obligations---against creditors including
Angelo Gordon & Co and Knighthead Capital
Management. Those firms own a majority
of the more than US$8 billion of debt owed
by the US territory s power agency.
The conflict is heating up after the Puerto
Rico Electric Power Authority, known as
Prepa, met with the financial adviser to its
creditors Monday to restart talks toward a
restructuring that may ask bondholders to
take a loss or wait longer to be repaid. Hedge
funds now hold as much as 30 per cent of
the obligations of Puerto Rico and its agen-
cies, Barclays Plc municipal-debt strategist
Mikhail Foux estimates.
"It s extremely disorderly and nasty," said
Joseph Rosenblum, director of municipal
credit research at AllianceBernstein Holding
LP. This "messy approach to trying to resolve
something with no clear structure or guid-
ance doesn t give a bondholder any kind of
confidence," he said.
The reason so much hedge-fund money
is riding on the island is simple: an increasing
number of distressed-debt funds are chasing
a declining number of opportunities. Little
wreckage remains from the 2008 financial
crisis, and six years of central-bank stimulus
has kept tomorrow s bankrupt companies
flush with cash.
Two of the biggest borrowers that teetered
after the financial crisis, Energy Future Hold-
ings Corp, the Texas power producer for-
merly known as TXU Corp, and the main
operating unit of Caesars Entertainment
Corp, are now in the hands of bankruptcy
The face value of bonds in Bank of Amer-
ica Merrill Lynch s US Distressed High Yield
Index of corporate securities has declined
to US$104.6 billion from as high as $644.1
billion at the height of the 2008 financial
At the same time, hedge-fund managers
began trading in 24 new distressed-credit
funds last year, the highest number since
2010, according to data provider Preqin.
Five have started this year, with total assets
growing to US$150.3 billion.
"There are not any obvious large distressed
situations, such as a Caesars or a Lehman
Brothers or TXU, coming down the pike,"
said Stephen Ketchum, chief executive officer
of the US$6.5 billion hedge-fund firm Sound
Point Capital Management, among investors
in the island.
"We were comparing Puerto Rico to some
of the worst sovereign debt situations in
history and it just didn t make sense to us,
especially since Puerto Rico is a US terri-
Prices on Puerto Rico s general-obligation
bonds plunged to as low as 55 cents on the
dollar last July, data compiled by Bloomberg
show. They ve since rebounded to about 68
cents. Bonds sold by Prepa reached 33 cents
a year ago, and have since climbed to 56.
Offering a chance
While the hedge funds are teeing up for
a fight, their money is giving the territory
a chance at getting out of its mess as tra-
ditional buyers like mutual funds flee.
"The capital from the distressed funds
has given the current government at least
a chance to enact the agenda and balance
the budget in the short term," said Aaron
Rosen, a principal at Archview Investment
Group, a Stamford, Connecticut-based
hedge-fund that manages about US$900
Nowhere in Africa is modern China more
of a lodestar than in Ethiopia, which on
May 24 held an uneventful election with
a predetermined outcome: another term
in office for the long-standing ruling
The continent s second-most-populous country and
fastest-growing big economy has close intellectual links
with China s Communists and often sends officials to their
party school in Beijing. There Ethiopians imbibe the gospel
of industrialisation overseen by a strong state that exerts
tight control over an ethnically diverse population with a
history of strife.
All is not well in the relationship, however. When a new
Chinese ambassador arrived in Addis Ababa in February,
he presented an unexpectedly awkward message to his
hosts. La Yifan told the ruling elite---behind firmly closed
doors---that it must discard the isolationism of the past
and open up an economy in which the flow of money
and information still is restricted. Banking and telecom-
munications are almost antediluvian. Investors are frustrated.
Trade lags behind expectations.
In short, after years of praising the government, the
Chinese are now singing from the same hymn sheet as
Ethiopia s Western critics.
The problem is a lack of courage. Many in the Ethiopian
government, ruling party and security apparatus acknowl-
edge that only further reforms can sustain the goals of
economic growth and political stability, but they are slow
to enact them.
The government s main priority is industrialisation, but
endless red tape and restrictions on finance deter investors.
Officials point to Huajian, a Chinese shoemaker that has
gone from employing 600 locals to 3,500 in a few years.
Ethiopia needs a hundred Huajians, however. Without
faster growth of industry, the country will struggle to absorb
the labour it hopes to free by modernising the subsistence
farms that provide a living for 80 per cent of its people.
The government is trying to help industry by building
roads, railways, power stations and dams, following the
Chinese playbook. These efforts have kept the official GDP
growth rate above 10 per cent, although outside experts
reckon that a more realistic tally is between seven per cent
and eight per cent. Inflation has dropped to single digits.
No progress has been made toward joining the World
Trade Organisation in the past three years, however, and
the prospects for attracting desperately needed foreign
equity capital remain dim.
The fear of being overthrown looms behind the elite s
reluctance to reform. In some ways it is a victim of its
own success. Discipline and administrative sophistication
have given the elite access to coercive tools that many
counterparts on the continent can only dream of, but now
it finds it hard to imagine life without them.
The situation has become worse, not better, since the
death in 2012 of Prime Minister Meles Zenawi, the architect
of the country s resurrection after a bloody civil war between
1974 and 1991.
After his death the government pulled off a peaceful
transition of power, with Deputy Prime Minister Haile-
mariam Desalegn taking over as planned.
Young people are angry and jobless. Outlets for their
frustration quickly are shut off. Sensible opposition leaders
are pushed into exile or prison, ceding the field to hotheads.
Universities have grown more than tenfold, but there are
insufficient jobs for all these bright new graduates.
Ethiopia is stuck thanks to its paranoid elite. The country
will be able to limp on for a while, given its impressive
growth rates. It may even get further boosts from new
infrastructure such as hydropower. Nonetheless, Ethiopia
is missing out on becoming something far more impressive.
Puerto Rico's US$72
billion distress mess
reunites banking foes
Continued on Page 19
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