El Salvador’s ‘bitcoin bond’ scheme receives cautious reception from fund managers

Bond investors had a dim view of El Salvador’s $1 billion loan scheme to finance a volcano.”bitcoin city,” says the plan could push the country further away from accessing traditional debt markets.

President Nayib Bukele, who in September launched bitcoin legal tender in the Central American country, said on Sunday that half of the proceeds will be used to buy cryptocurrency and the rest for infrastructure and bitcoin mining.

Emerging market fund managers have expressed little interest in buying new bonds that El Salvador plans to issue next year with an annual yield of 6.5%. That is much lower than the prevailing interest rate on the country’s existing overseas bonds, which have seen higher yields this year such as investors faltered in the increasingly unorthodox direction of Bukele’s economic policy.

“Why would you lend them money at this rate when it’s a tough credit?” Kevin Daly, a fund manager at Aberdeen Standard Investments said. “They are closed [conventional] bond market so they can’t finance themselves that way. I don’t know who is going to buy these bonds but it certainly won’t be us. “

The debt sell-off in Salvador continued on Monday, pushing yields on bonds maturing in 2032 above 13%. The country has 10 international dollar bonds worth $7.65 billion, representing about 30% of gross domestic product and about a third of total government debt.

Its next repayment is an $800 million bond that matures in January 2023. That bond currently trades at 84 cents less than the dollar — and yields close to $25. % – indicates significant anxiety about El Salvador’s solvency. .

The new “bitcoin bond,” which will be sold in $100 tranches in a deal arranged by crypto exchange Bitfinex, may find a more receptive audience among small investors and those Cryptocurrency enthusiast.

“This bond offering is something we think will be attractive to a wide variety of investors ranging from crypto investors,” said Samson Mow, chief strategy officer at blockchain technology firm Blockstream. death, profit-seeking investors, ‘hodlers’ and ordinary people. advised Bukele’s government on the plans. “We believe this bond has the potential to accelerate hyperbitcoinization and bring about a new financial system built on top of bitcoin.”

Bond holders will earn “exceptional dividends” generated from the “substantial liquidation” of El Salvador’s bitcoin holdings, Mow said.

A bond issuer said many investors’ motives are not purely financial. “There is a desire to be part of something so groundbreaking,” the person said.

“Sentiment is positive as there is already a lot of capital in the digital token space. In fact, less attractive projects attract more interest,” the person added.

But El Salvador’s existing bondholders worry that the plan is unlikely to improve the country’s overall creditworthiness, especially if its success convinces Bukele’s government it will. can fix your finances with IMF support. Analysts say talks with the fund have dragged on all year with little prospect of a breakthrough.

“I wouldn’t be surprised if they raised money,” said Carlos de Sousa, a portfolio manager at Vontobel Asset Management. “But it is likely that bitcoin bonds make the probability of an IMF program even lower because they say we have managed to find a new source of financing.”

De Sousa said El Salvador had little prospect of regaining access to the bond market without at least the potential for future IMF support, adding that without market access , the country will have difficulty repaying its bonds in 2023.

The country’s relationship with the US dropped even further on Monday when Washington’s interim special envoy to El Salvador, Jean Manes, speak she is leaving the country.

“We are on pause because the El Salvador government has not shown any interest in improving relations,” she said in a local news interview.

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