Analysis: Ivory Coast investors brace for bond default

LONDON Wed Jan 5, 2011 11:39am EST

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LONDON (Reuters) - The clock is ticking for Ivory Coast to pay interest on a $2.3 billion bond and investors are skeptical the West African country, in the midst of a tense political stand-off, will avoid its second debt default in little over a decade.

Ivory Coast owes nearly $30 million on the bond after failing to make a payment last week but has a 30-day grace period, until the end of January, before it would be declared in default.

Meanwhile, its crisis looks to be deepening. Laurent Gbagbo shows no signs of caving to mounting pressure to cede power to presidential rival Alassane Ouattara, internationally seen to have won a November 28 election.

More than 170 people have been killed since the dispute started, the World Bank has cut aid and the regional central bank has cut Gbagbo from Ivorian accounts -- making it hard for him to pay civil servant or army wages just as West African states consider potential military intervention.

"As it stands at the moment, it's hard to see the bond coupon being paid," said Hannah Koep, head of the Africa desk at London-based consultancy Control Risks. "Gbagbo needs what money he has to pay the army and keep his support network going. Foreign bondholders just aren't going to be a priority."

If Ouattara is handed signature rights at the central bank and access to aid, he might be able to make the payment -- but without control of the country itself he would have little reason to unless his international backers win him serious concessions.

Even if Ouattara chooses to make payments in the short term to avoid further complicating the situation with a default, few see a quick solution to the crisis and default risks will rise over time if it remains unresolved.

"If Gbagbo is unlikely to step down and the African political decision makers, especially Nigeria and South Africa, are likely to blink as they did with Zimbabwe, then Ouattara is not in a strong position in the longer term and the debt is in serious jeopardy," said one source with considerable experience of Ivorian debt negotiations.

The bond from the world's top cocoa producer met brisk demand when it sold last year in a restructuring of existing defaulted debt, despite the fact the country had not held elections since a civil war ended in 2002/03.

DEBT YIELDS UP

Considered a "frontier" market by investors, the debt, which matures in 2032 but starts to pay back principal in 2016, set record low yields below 10 percent in October ahead of November elections, as few investors predicted problems with the outcome.

But yields have since ratcheted up close to 16 percent, at a price of around 40 cents on the dollar.

"I don't think it's impossible that the coupon will be paid within the grace period, but there is no indication that things will get sorted out in time," said Graham Stock, chief strategist at frontier fund manager Insparo.

"Both camps have a strong incentive to keep resources back for building up domestic support."

Things looked like they were moving in the right direction for Ivory Coast in the past couple of years.

The country became eligible for debt relief in 2009 under the IMF-World Bank HIPC (highly indebted poor countries) initiative and also had $845 million in sovereign debt canceled with Paris Club creditors and further debt payments deferred.

The new bond replaces $2.4 billion in bonds issued by Ivory Coast in 1998 as part of the Brady scheme of debt restructuring, on which it defaulted in 2000, following a 1999 coup.

Barclays Capital analysts say that the previous bonds traded as low as in the teens after the 2000 default.

"Levels in the mid-30s post-default, and potentially even lower in the 20s if the longer-term situation deteriorates further, do not seem absurd to us against this background," they wrote to clients.

Thierry Desjardins, chair of the London Club committee of commercial creditors which negotiated the restructured debt, said last week he would try to start negotiations with Ivory Coast before the end of the grace period.

Any negotiated agreement to extend the repayment period would enable Ivory Coast to avoid default.

But the problem is that it remains unclear with whom any debt restructuring committee would be talking.

"There is no mileage in negotiating any kind of restructuring when you do not know which government you should be dealing with," said Stuart Culverhouse, chief economist at frontier markets brokerage Exotix. "The Ivorians have more to worry about than a $30 million payment."

Many fixed income fund managers who track benchmark indices such as those compiled by JPMorgan are likely to hold Ivorian debt, as the bond's large size has ensured it a place there.

But many will be unable to hold defaulted debt due to their internal regulations, forcing a further sell-off on non-payment.

However, cocoa production has barely been disrupted and analysts were forecasting before the election that the country, which also produces oil, would have an enviable growth rate of 4.5 percent in 2011.

If the crisis ends -- perhaps with a power-sharing deal such as that seen in Kenya or Zimbabwe -- and aid resumes, the bond could still prove an appealing bet even with temporary default.

"In the short term, the bonds will clearly trade on the back of the politics, but long-term country fundamentals continue to be attractive, assuming that the political crisis ultimately gets resolved," said Societe Generale in a note.

(Additional reporting by Peter Apps)

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