Bond investors have a vague view of El Salvador’s plans to borrow $ 1 billion for a volcano-powered “bitcoin city, And says the scheme could push the country further from accessing traditional debt markets.
President Nayib Bukele, who made in September bitcoin legal tender in the central american country, sunday said half of the proceeds will be used to buy the crypto currency with the rest for infrastructure and bitcoin mining.
Emerging market fund managers have expressed little interest in buying the new bonds, which El Salvador plans to issue next year with an annualized 6.5 percent coupon. This is well below the prevailing interest rate on the country’s existing overseas bonds, which has pushed yields higher this year. investors falter at the increasingly unorthodox direction of Bukele’s economic policy.
“Why would you lend them money at this level if it’s an emergency credit?” said Kevin Daly, a fund manager at Aberdeen Standard Investments. “They are excluded from the [conventional] bond market so they can not finance themselves like that. I do not know who will buy these bonds, but it will definitely not be us. ”
The sell-off in Salvadoran debt continued Monday, bringing yields on a mortgage maturing in 2032 above 13 percent. The country has $ 10.65 billion in $ 10.6 billion worth of international bonds, about 30 percent of its gross domestic product and about a third of its total government debt.
Its next debt repayment is an $ 800 million bond maturing in January 2023. That bond is currently trading at a price of less than 84 cents on the dollar – and a yield of nearly 25 percent – indicating considerable anxiety about El Salvador’s ability to make the payment.
The new “bitcoin bonds”, which will be sold in $ 100 cuts in a deal to be arranged through the crypto exchange Bitfinex, could find a more receptive audience among small investors and crypto enthusiasts.
“This bond offering is something we think will appeal to a wide range of investors, ranging from cryptocurrency investors, yield seekers, ‘hodlers’ and ordinary people,” said Samson Mow, chief strategy officer at blockchain technology company Blockstream. what Bukele’s government advised on the plans. “We believe this connection has the potential to accelerate hyperbitcoinization and bring about a new financial system built on top of bitcoin.”
Holders of the mortgage will earn “special dividends” generated by “distributed liquidation” of El Salvador’s bitcoin holdings, Mow said.
One person working on the issuance of bonds said many prospective investors’ motives are not merely financial. “There is a desire to be a part of something so groundbreaking,” the person said.
“Sentiment is positive because there is already a lot of capital in the digital token space. In fact, much less exciting projects have attracted more interest, ”the person added.
But holders of El Salvador’s existing bonds are worried that the scheme is unlikely to improve the country’s overall creditworthiness, especially if its success persuades Bukele’s government to recover its finances with the IMF support. Negotiations with the fund have been dragging on all year with little prospect of a breakthrough, analysts say.
“I would not be surprised if they were able to raise the money,” says Carlos de Sousa, a portfolio manager at Vontobel Asset Management. “But possibly the bitcoin effects make the likelihood of an IMF program even lower because they say we have managed to find a new source of funding.”
El Salvador had little prospect of regaining access to bond markets without at least the potential for future IMF support, de Sousa said, adding that without market access he would struggle to repay his 2023 bonds.
His relations with the US reached a further low on Monday when Washington’s interim chargé d’affaires in El Salvador, Jean Manes, said she would leave the country.
“We are taking a break because the government of El Salvador is not showing any interest in improving the relationship,” she said in a local news interview.