Bond investors take dim view of Ortega of Nicaragua

By Lester Pimentel – Bloomberg News

NEW YORK: As far as bond investors are concerned, President Daniel Ortega of Nicaragua is returning to his Sandinista roots.

Yields on Nicaraguan debt have risen to the highest level in Latin America since Ortega aligned himself with Iran and Venezuela, seized an Exxon Mobil oil facility and told the United Nations that the “genocide perpetrated by global capitalism” was responsible for “destruction, death and poverty.”

The increase is a turnaround from earlier this year, when the former guerrilla leader said he would improve relations with the United States. Now, investors are growing concerned that Ortega, 61, will return to policies he used in the 1980s, when the country defaulted and inflation topped 14,000 percent.

“There are two Ortegas,” said Larry Birns, who heads the Council on Hemispheric Affairs in Washington. “There’s the Ortega that looks at his own errors and wants to make amends. The other Ortega wants to be a major spokesman for the developing world. We don’t know what road he is going to take.”

Yields on the government’s benchmark 4.5 percent dollar-linked bonds due in 2015 have jumped 2 percentage points to 13 percent since April.

The securities are denominated in the local currency, the córdoba, and payments are linked to the U.S. dollar exchange rate. They are quoted at about 50 cents, down from 55 in April, according to Exotix, a London-based firm that specializes in distressed debt.

Yields may keep rising, said Amir Zada, assistant director at Exotix. “Ortega’s negative rhetoric and unfriendly attitude toward private enterprise have soured the mood,” he said.

They yield more than all 169 dollar securities listed in JPMorgan Chase’s benchmark developing-nation index. They are not included in the index, the benchmark for emerging market debt.

Nicaragua issued so-called land bonds in the 1990s to compensate Nicaraguans whose property had been taken by the government. The securities total $974 million and account for about 17 percent of the country’s $5.8 billion total debt, which is rated B3, or six levels below investment grade, by Moody’s Investors Service.

Foreign investors, including hedge funds, hold about 80 percent of the bonds, according to Exotix. The securities trade on the Nicaraguan Stock Exchange and in private transactions. As much as $10 million worth trades a month, according to data compiled by the exchange and Exotix estimates.

Land grabs were part of Ortega’s socialist policies. He also restricted trading, increased public spending and took over banks and supermarkets. When Ronald Reagan was president he called Ortega “the little dictator” and ordered a blockade of Nicaragua and funded the Contra rebels. The Nicaraguan economy fell into recession, gross domestic product per capita fell by more than a third and debt rose to more than five times GDP.

Nicaragua, a coffee, beef and sugar exporter, now is the second-poorest nation in Latin America, with a GDP per capita of $848, trailing only that of Haiti, according to the International Monetary Fund in Washington.

Yields on land bonds due in 2015 rose to 19 percent in November, from 10.5 percent earlier in the year, as Ortega climbed in polls before elections. They dropped after he took office in January and pledged better relations with the United States, and fell as low as 11 percent in March.

Investors’ confidence ebbed as Ortega signed energy accords with Venezuela and sought investment from Iran.

In the past two months Ortega’s government has seized an Exxon fuel storage terminal and scrapped government contracts with a business owned by an opposition party leader. “There’s concern that old dogs don’t change their tricks,” said Henry Avis-Vieira, president of Wesbruin Capital, a Virginia-based firm that advises investors on distressed developing-nation debt.

Nicaragua’s participation in the U.S.-backed Central American Free Trade Agreement shows Ortega wants to maintain relations with the United States, said Russell Crandall, a visiting fellow at the Center for American Progress in Washington.

Nicaragua is also negotiating a new loan with the IMF. The United States is Nicaragua’s biggest trade partner and provides about $220 million in aid a year to the government.

Rising yields signal that investors are concerned that the bonds will not be repaid when they start coming due next year.

“It’s paper with zero value,” said Marlon Gutierrez, an anti-Ortega activist in Miami. “Nobody wants to put money in our country.”