Troubled-debt specialist Gramercy Funds smells of an “opportunity for experienced credit investors” in China’s cash-strapped property sector and has stocked up on property company bonds.
Founder Robert Koenigsberger consolidated Russian debt in the late 1990s and played an important role in restructuring Argentine government bonds.
Now the $5.5 billion investment manager sees parallels in China, where the value of property company bonds has fallen since development giant Evergrande began missing payments on its debt last year. . From zero exposure to the sector before Evergrande, Gramercy has accumulated up to $200 million in corporate bonds and plans to buy more.
“About 10 of [companies] that we are definitely focused on trading below an inherent value that we believe we can achieve by participating in catalyzing a restructuring in a reasonable timeframe,” Koenigsberger said.
“It reminds me of the ‘good old days’ of emerging markets. . when it was more of a nascent asset class,” he added.
Many analysts value bonds in the sector between 10 and 40% against the dollar, because that’s what the companies’ assets would be worth if they defaulted and were liquidated.
But Gramercy has spoken to CFOs and thinks they want to work out a deal with their creditors. They just don’t know how.
“There’s a real lack of experience on how to put Humpty Dumpty back together,” Koenigsberger said. “Rather than detecting a lack of willingness to pay/restructure, we are seeing a lot of signs of good faith.”
“There is an opportunity for experienced creditors to come with good ideas and leadership skills and show the possibility to these CFOs. . . that there is a way to get to yes,” he said.
The recent purchase by Gramercy of the debt of a Chinese real estate company places it at the opposite of certain large financial groups. BlackRock, HSBC and Fidelity were among fund companies that reduced exposure to the sector in March and April, according to Bloomberg data. In May, Goldman Sachs analysts sharply raised their default forecast for the sector’s US dollar-denominated bonds.
Gramercy’s enthusiasm for Chinese real estate does not extend to some of the other major troubled markets. Gramercy avoids Russian assets and has already sold Ukrainian debt which it recovered immediately after the invasion at a steep discount.
“We are not convinced that there is value in Ukraine at 35 [cents on the dollar] because the longer this conflict unfortunately lasts, we can all see not only the damage that has occurred, but[also]. . . the huge costs it will take to rebuild the country,” Koenigsberger said.
Gramercy is wary of Ukrainian debt because he expects a post-war Ukrainian debt restructuring to force bondholders to accept much less than face value. Koenigsberger said the situation reminded him of the 2010s when the G7 granted “extraordinary debt relief” to Iraq to help it recover from war. Private creditors suffered an 85% decline in the net present value of their obligations.
If Ukraine receives similar treatment, “How could a bond with an 85% discount be worth 35 cents?” He asked
Gramercy’s multi-strategy fund is down about 3% for the year to the end of May, compared with a nearly 20% drop for JPMorgan’s emerging markets bond index, people familiar with the results said. Last year, Gramercy rose about 8% and the index remained roughly flat.
The weighted average return for the entire hedge fund industry for the month of May was negative 1.1%, according to internal analysis by Citco, the leading hedge fund administrator, which serves about a quarter of the market. The average return during the first quarter of 2022 was negative 3.2%.