Analsysis: Defaulted Ivory Coast debt finds tentative buyers

LONDON Wed Apr 13, 2011 8:27am EDT

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LONDON (Reuters) - Investors have been buying Ivory Coast's $2.3 billion bond in the hope new President Alassane Ouattara will soon lift it out of default, but concern over Ouattara's priorities is injecting a note of caution.

Ivory Coast defaulted on the bond at the end of January -- effectively freezing the world's top cocoa producer out of international markets -- while in the throes of fighting following last November's disputed presidential election.

Ouattara, internationally recognized as the winner of that election, is sole leader of the country following the capture of his predecessor Laurent Gbagbo on Monday.

The bond fell below 40 cents on the dollar after the default, but has been recovering in recent weeks.

It was trading at 53.4 on Wednesday, though that is below four-month highs hit last week in anticipation of a victory for Ouattara, reflecting some investor caution.

Ivory Coast needs to make an outstanding $29 million coupon payment on the bond, and resume future coupon payments, to end the default.

"If there are no significant setbacks on the way, then the market expectation would be to get a resumption of the coupon payments," said Kevin Daly, emerging debt fund manager at Aberdeen Asset Management, which holds the bond.

"Probably the expectation is that the earliest anyone will get paid is June, when the next coupon gets paid. At this point, there are larger priorities."

Ouattara is likely to focus on stabilizing the security situation, winning over Gbagbo supporters who made up 46 percent of the electorate in November, and seeking international aid to get the economy back on its feet, investors say.

He has already won indications of support from France, which was instrumental in capturing Gbagbo, the European Union and the World Bank. The World Bank froze aid to the country in December.

"Without the French, Gbagbo would be still in his bunker and Ouattara will be very dependent on foreign and donor support going forward," said Hannah Koep, Africa analyst at consultancy Control Risks.

COCOA TAXES

At first blush, it looks quite easy for Ivory Coast to make a $29 million payment, along with a subsequent $29 million payment in June.

Ivory Coast, which exports 40 percent of the world's cocoa, stands to make around $600 million a year in export taxes, at current cocoa prices.

Gbagbo's arrest and the lifting of European Union sanctions on Ivory Coast's two main ports mean cocoa exports may be possible by next week, dealers say.

However, the banking system has been heavily disrupted, administrative functions such as export tax collection are paralyzed and Ouattara has a number of factions to appease.

"Ouattara is probably going to pay his army first before solving the default," said David Dowsett, senior portfolio manager at Bluebay Asset Management, which does not hold the bond, adding:

"We don't know the state of the central bank reserves."

Ivorian reserves held at the West African central bank (BCEAO) were estimated at around $3 billion before the crisis, but investors speculate they could now be much lower.

Analysts also point to the disruption to the economy caused by the civil war, in which more than 1,000 people were killed.

Ivory Coast was heading for 3 percent growth in 2010 but growth came to a standstill over the past four months, said Barclays Capital analysts in a note.

"It will take some time before annual growth reaches pre-crisis levels," Barclays said.

"Public finances are likely to remain under pressure for some time."

While the bond has risen, investors say it would be higher still if they were more confident about payment.

"We do expect the bond to rise. It was trading in the low-60s last year and that's the target to get to," said Sergei Strigo, head of emerging markets debt at Amundi Asset Management, which holds the bond.

"But first we need to see some normalizing of the situation, the government being formed and obviously a statement on the resumption of coupon payments."

Longer term, analysts see the 2032 bond, which has an amortizing structure allowing repayment of the principal from 2016, reaching levels around 80 cents on the dollar.

Ivory Coast has a chequered debt payment history, having failed to service its debt on two previous occasions.

But Ouattara may feel he owes a debt to the international community, following France's help in capturing Gbagbo.

The change of presidency, after Gbagbo's hold on power since 2000, is also injecting new optimism.

"This country has been shut out to foreign investment for the last decade," said Daly.

"If you start to get money coming back in, that will be very positive."

(Additional reporting by Sujata Rao, Peter Apps and David Brough, graphic by Scott Barber; editing by Stephen Nisbet)

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