El Salvador’s dollar denominated notes due in 2050 fell 2.2 cents to 64.4 cents on the U.S. dollar on Monday, the lowest ever. The Central American country’s debt was among the world’s worst performers on Monday as investors considered whether President Nayib Bukele’s plan to sell sovereign Bitcoin bonds closes the door on a deal with the International Monetary Fund.
El Salvador’s progress with the IMF has soured since May, when Bukele’s party took over the assembly and fired five top judges and the attorney general. His policies, including the adoption of Bitcoin as legal tender, have been repeatedly criticised by the multilateral lender.
“This announcement cements the ‘anything-but-the-IMF’ path,” said Nathalie Marshik, a Stifel Nicolaus & Co. managing director. Bonds are falling “as the market reassesses possible recovery value lower on unpredictability of policies.”
The nation’s debt is trading in distressed territory, with investors now demanding 1,168 basis points in extra yield to hold El Salvador’s dollar bonds over U.S. Treasuries, according to JPMorgan Chase & Co. data. While the plan to sell new, tokenized bonds could offer the government some breathing room, it also adds to uncertainties and potential risks.
For Siobhan Morden, head of Latin America fixed income strategy at Amherst Pierpont Securities, the announcement of the Bitcoin bond is a sign that the nation is doubling down on its own funding and growth.
“Innovative financing is not in itself a solution,” she wrote in a note Monday.
The nation’s next big payment to external creditors isn’t due until January 2023. The $1 billion in the tokenized bonds could give the government a respite, as talks with the IMF for a $1.3 billion loan have been downgraded to an annual Article IV review, according to the lender.
The proposed 10-year tokenized Bitcoin bond is expected to pay 6.5% annually, with an added dividend of 50% of any Bitcoin gains once El Salvador has recouped its original investment, according to Blockstream Corp. Chief Strategy Officer Samson Mow, who announced the plan on stage with Bukele during a Bitcoin conference. Those dividends will either be paid in dollars or the cryptocurrency Tether, a so-called stablecoin meant to be a dollar proxy, he said.
As soon as legislation is in place allowing the new bond, the nation will release a prospectus, Mow said. For now, the biggest challenge is how little is known.
For the Bitcoin crowd, it may be a more risk-averse bet, said Carlos de Sousa, a portfolio manager at Vontobel Asset Management in Zurich. The 50% dividend the bond plans to pay if the price of the crypto currency rises, may look appealing if investors aren’t penalized for any Bitcoin weakening — but it’s too soon to know without a prospectus, he said.
“If you have too much money on…