Gramercy bets on beaten-down Chinese property company bonds

Emerging markets specialist Gramercy, which made big profits a year ago on distressed developer debt in China, has scented an opportunity to repeat the trick and has bought back into the sector.

Robert Koenigsberger, founder of the Greenwich, Connecticut-based investment firm, told the Financial Times that distressed bonds of Chinese developers such as Country Garden, which currently trade at a liquidation price of about 8 cents on the dollar, could triple in value when a restructuring was completed.

“It’s a good time for select names in Chinese real estate. It is 25, 30 per cent of [gross domestic product] and it’s not going to disappear,” said Koenigsberger. “In order for that sector to survive, it is going to need access to financing and the path to financing is through debt restructuring, not liquidations.”

Gramercy loaded up on developer debt in 2022 and sold out at a significant profit early last year. It did better than rivals who stayed in the sector and suffered as dozens of Chinese developers including Country Garden defaulted on dollar bond payments last year amid plunging home sales and a loss of access to credit. Bond values plummeted as investors feared the industry, a chief engine of economic growth, would struggle given weak home buying sentiment and a lack of policy support.

Koenigsberger said the fund began rebuilding its position over the past six months as recent restructurings of defaulted Chinese developers such as Sunac raised hopes that the worst may be over.

“We’re not saying you’re going to get par,” said Koenigsberger. “But when you start at 5 cents on the dollar and you get 15, that’s a heck of a return.” He said the experience supported his view that emerging markets investors should pick and choose among publicly traded equities and debt, rather than hugging a broad index.

In 2023, Gramercy’s flagship multi-strategy fund returned 16.7 per cent net of fees compared with 11 per cent for the JPMorgan EM Equal Weight Total Return index, which blended the bank’s three best known emerging market indices, according to an investor who received the fund’s year end note.

Venezuela was another spot where Koenigsberger saw potential because relations between Washington and Caracas have improved following Russia’s full-scale invasion of Ukraine. He said the South American country had benefited from the easing of US sanctions on its oil industry in October and the entry of US companies such as Chevron.

“We think there’s a great investment opportunity in Venezuela because bonds that faced trading restrictions . . . are now free to trade,” he said, adding the potential normalisation of Venezuela’s weighting in JPMorgan EMBI Index, a benchmark for debt issued by emerging market governments, would create demand for the country’s bonds. 

“As we sit here today in January 2024, index weight is zero,” he said. “It’s on its way to something higher.”

While Venezuela had a history of defaulting on its sovereign debt, Koenigsberger said he expected the current administration to work out a plan that would not leave investors entirely in the cold. “You cannot get back to the capital markets without fixing your default. So we believe the path back to the capital markets for Venezuela is a restructuring.”

Koenigsberger was also looking at Turkish sovereign debt, which Gramercy had shunned for a long time, as the country’s efforts to fight runaway inflation by raising interest rates to 42.5 per cent last month began to pay off. “You can see the light at the end of the tunnel and it’s not an oncoming train,” he said.

Koenigsberger added that investors in emerging markets should emulate allocators in developed markets and build up their private market holdings. Gramercy has made a big push into asset-backed loans that he said offer higher yields and provide better protection in the event of defaults. 

“If you buy Turkish sovereign and corporate bonds, you probably get no collateral,” he said, adding that yields were roughly 8 per cent. “If we lend private debt to borrowers in Turkey, we can get gas stations and apartments and shopping malls as uncorrelated collateral to their business yet still get 10 per cent additional yield per annum, or 18 per cent.”