Want to bet on Kim Jong-un? Try North Korea debt

NEW YORK Tue Dec 20, 2011 10:49am EST

An anti-North Korea activist shows North Korean banknotes to the media before he releases balloons carrying the banknotes and anti-North Korea leaflets towards the north at the Imjinkak pavilion, near the demilitarised zone (DMZ) separating the two Koreas in Paju, about 55 km (34 miles) north of Seoul, March 17, 2009.   REUTERS/Jo Yong-Hak

An anti-North Korea activist shows North Korean banknotes to the media before he releases balloons carrying the banknotes and anti-North Korea leaflets towards the north at the Imjinkak pavilion, near the demilitarised zone (DMZ) separating the two Koreas in Paju, about 55 km (34 miles) north of Seoul, March 17, 2009.

Credit: Reuters/Jo Yong-Hak

NEW YORK (Reuters) - The price of hard-to-find North Korean debt edged higher on Monday as some adventurous investors took a long-shot bet that the secretive country could open up after the death of Kim Jong-il.

Obscure North Korean debt certificates, tied to long-defaulted syndicated loans from the 1970s, traded in the market on Monday with a bid/ask spread around 14/18 cents on the dollar in London, up from a range of 13/15 cents last week, according to London-based Exotix Ltd, a specialist frontier market brokerage firm.

The death of Kim, 69, was announced on Monday and has brought forward the accession of his relatively untested son Kim Jong-un, thought to be in his twenties. Educated in Switzerland, the younger Kim is thought to speak English and German, and bears a striking resemblance to his grandfather, the North's founder, Kim Il-sung.

"A lot of the domestic attention is going to be on the funeral, the transition and securing the son's transition. That succession, which the regime has been planning for years, is likely completed in the next few months so nothing happens, but investors will be thinking what comes next," said Stuart Culverhouse, chief economist at Exotix Ltd.

"If there is a rapprochement with the international community that would be a positive, but the bigger issues of denuclearization and six-party talks will come second to securing the domestic situation. It could lead to a power struggle, but we won't know about that for a while," he said.

According to Exotix, syndicated loans with a face value of roughly $1 billion were in the market, but have been in default since the mid-1980's.

Culverhouse said "small amounts" of the North Korean debt securities changed hands on Monday but declined to give specifics for competitive reasons.

"If you buy, you are buying on the expectation of events moving the price because they have been in default for 20 to 30 years," Culverhouse said.

"They have been accruing interest since then, so the claims which are principal plus interest could be four to five times larger depending on the loans and the terms," said Culverhouse.

But before mom and pop investors get too excited, Exotix notes that the typical deal size is around $5 million, meaning institutional investors are likely the only ones able to trade the debt.

"These are really only suitable for the professional investor," said Culverhouse, adding: "This is similar to all frontier debt and not something that you can necessarily trade on a screen."

Prices cited in the market in 2009 had the debt trading at around 10 cents on the dollar.

The debt trades through the Euroclear system, making it more efficient even though it is not uncommon to have several weeks go without a trade. When an investor does want to buy or sell, it can take several days, if not more to find a counterparty to complete the transaction because it is such a highly illiquid market, Culvershouse said.

(Reporting By Daniel Bases; Editing by Gary Hill)

(This story corrects the spelling to Exotix in paragraph 10)