Sovereign Distressed Credit

Presenters

Carl Ross

Tina Vandersteel

 

Overview

Emerging sovereign debt investing spans a broad opportunity set that includes very high credit quality countries, single/double B type countries, distressed countries, and defaulted countries. The 2020 pandemic brought a bumper crop of sovereign defaults and pushed some credits into stress/distress. We discuss how GMO positions its portfolios in the stressed, distressed, and defaulted countries, showcasing alpha techniques as well as future total return potential coming from the defaulted countries getting back on their feet.

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Key Points

  • GMO’s Emerging Debt team has navigated numerous defaults over the past 30 years, and 2020’s pandemic brought us seven at-bats, far more than normal.
  • Our three-stage investment strategy around default involves:
    • Ahead of the event: Where possible, we carefully use security selection to navigate deep uncertainties that come when countries become stressed and either get official sector help or end up in default/restructurings; we estimate ranges for recovery values in default, based on fundamental analysis.
    • During the restructuring: We are active participants and, in some cases, lead default negotiations with the country, enhancing recovery for investors.
    • After the event: We carefully choose securities positioned to benefit from a country’s return to “normal”.
  • We estimate circa 400 bps of total return for the asset class coming from a base case analysis of our current set of defaulted or just-post-restructuring countries, and we highlight which currently stressed and distressed countries offer promising security selection alpha as we discover whether they will default.

Default timing is also very relevant

As Hemmingway said, it happens gradually, then suddenly

 

As of 10/6/2021 | Source: J.P. Morgan

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Disclaimer: The views expressed are through the period ending November 2021, and are subject to change at any time based on market and other conditions. This is not an offer or solicitation for the purchase or sale of any security and should not be construed as such. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities.
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