Read on Twitter
Why you should be investing in hy dodgy #EM bonds... (bc you have leeway to be wrong!) A long thread...
Assume an equal cash weighted basket of:
Egypt 8.875% 50 @ 55c
Buenos 5.25% 37 @ 34.75c
Ngeria 8.25% 51 @ 63.5c
Pkstan 7.875% 36 @ 37.5c
Pemex 7.69% 50 @ 69c
1/n
Assume an equal cash weighted basket of:
Egypt 8.875% 50 @ 55c
Buenos 5.25% 37 @ 34.75c
Ngeria 8.25% 51 @ 63.5c
Pkstan 7.875% 36 @ 37.5c
Pemex 7.69% 50 @ 69c
1/n
Assuming no leverage and no cost of carry. I run a scenario analysis where Pakistan defaults after 1yr, Egypt defaults after 2yrs and Buenos defaults after 3yrs. I assume I sell the defaulted bonds at 30c after they default.
2/n
2/n
SO, basically you are batting a 40% hit ratio. 3 defaults out of 5 in 3yrs. You stink at picking credits...
Your total returns would be as following (cummulative)
Y1: +11.55%
Y2: +14%
Y3: +22.55%
3/n
Your total returns would be as following (cummulative)
Y1: +11.55%
Y2: +14%
Y3: +22.55%
3/n
You had 3 defaults out of 5 in 3years. Assuming 30c recovery (we can argue this), your total return after 3yrs is +22.55% or annualised roughly of 7.03%. This assumes no price appreciation on the bonds that survived.
4/n
4/n
So you can be very wrong and still do ok. We can argue specifics of recovery values etc, but the idea should be simple. These distressed prices offer a large margin of error. (Dont lever up!) And if 3 out of 5 credits survive, then you make out like a bandit! #marginoferror
end.
end.
• • •
Missing some Tweet in this thread? You can try to
force a refresh
