Emerging-markets bond investors are a sore lot these days. They fret that international policymakers’ plans to make them share the pain of future financial meltdowns -- instead of being bailed out by, say, International Monetary Fund loans -- could reduce the attractiveness of the entire asset class. Many emerging-markets investors see Ecuador’s default last year, and its subsequent Brady bond restructuring, as an example of a coercive process that lacked sufficient consultation with bondholders.
A group of eight U.S.-based emerging-markets portfolio managers, representing large hedge funds, insurance companies and fund managers, has decided to fight back. Hence last month’s creation of the Emerging Markets Creditors Association, which includes such big investors as HBK Investments, Metropolitan Life Insurance Co., Morgan Stanley Dean Witter Investment Management and Pacific Investment Management Co. The founders hope the group will become bondholders’ primary vehicle for sharing ideas, organizing votes for the acceleration of bond payments, focusing lobbying efforts and providing feedback to sovereign issuers and policymakers.
“The buy side has been too quiet for too long,” says Mohamed el-Erian, a Pimco investment manager and former IMF official. He cites three reasons for creating the new association: “First, the buy side was not adequately represented in ongoing official sector discussions about bail-ins. Second, decisions on market practices were being made without buy-side consultation. Third, there was a string of poorly handled capital markets transactions by investment banks, which served to unduly undermine sovereign curves.”
El-Erian asserts that the initial response from other buy-side investors has been very positive. But not everyone is gung-ho about EMCA. “I think it is totally wrong,” says Ali Naqvi, head of emerging-markets debt at Citibank Global Asset Management. “Efficient markets should be made up of fragmented investors. Whenever you create a cartel, you remove market efficiency.” He also worries that the new organization will be run to benefit its largest members. Counters el-Erian: “There is no reason why EMCA should serve just one group on the buy side. Its initial representation is broad, bringing different types of investors, both in terms of size and strategy. EMCA would look to be inclusive for all the buy side.”
But this may not be the best time for bondholders to go public with their concerns. “People will say, in Mexico, in Asia and somewhat in Russia, ‘These investors got bailed out by the taxpayer every time,’” argues Naqvi. “Now is the time to lay low and not attract attention. Otherwise, you become a target.”
