Iraq's defaulted debt attracts buyers

An F/A-18 Hornet prepares to launch off the deck of the aircraft carrier USS Kitty Hawk in the Gulf, Monday. Western companies are beginning to consider ways to profit from the aftermath of a US invasion of Iraq. PHOTO: AP

As other investors prepare for war by hoarding the safest US government bonds, Michael Lambert is targeting Iraq. His Bermuda-based Emergent Alternative Fund has bought rights during the past year to US$6 million of defaulted loans to President Saddam Hussein's regime.

About US and UK forces are massed on the Iraqi border and President George W. Bush and his allies are calling for Hussein's ouster. Meanwhile, investors are offering double the price for Iraqi debt that they did six months ago -- although none has been repaid during a decade of UN sanctions.

Some managers who invest in high-risk securities for affluent investors are so confident a future oil-rich Iraq will pay Hussein's bills that they're offering US$0.16 on the dollar.

Last September, the US$11 billion of Iraq's US$62 billion debt that's on the market was trading at US$0.08 on the dollar.

"These guys will have the means to pay," said Lambert, who oversees US$45 million in funds. "The US will throw quite a bit of resources to putting in place very strong economic structures in Iraq."

JP Morgan Chase & Co, BNP Paribas SA's Banque Nationale de Paris and Commerzbank AG were among banks that lent in the 1980s to Hussein, who turned a country with the world's second-largest oil reserves into the second-most-indebted developing nation per person.

Investors now betting Iraq is more likely to pay its debts than United Airlines, the world's second-biggest carrier, whose defaulted bonds trade at US$0.12.

Iraq's debt is part of a US$51 billion market for securities defaulted on by 11 nations that face US trade embargoes, including Cuba, North Korea and Libya. The sanctions prevent US companies taking a stake, so the debt trades among companies based in Europe and elsewhere that aren't affected by the embargoes.

Prices climb further if a US-allied government replaces Hussein's regime, investors said.

"Under any conventional debt-relief assumptions, the price of the debt could easily double," said Richard Segal, director of research at Exotix Ltd, the London-based brokerage of ICAP Plc, which trades Iraqi debt. He estimates the total Iraqi debt that is traded on the market at US$11 billion.

In 1991, when Vietnam still faced US sanctions, the country's defaulted bank loans traded for as little as 4 cents on the dollar. The US lifted its embargo five years later and the debt reached more than US$0.80.

Foreign bank loans helped Iraq's army pay for goods ranging from boots to tobacco through the early 1980s as Hussein, condoned by Washington, fought neighboring Iran for eight years after Tehran's Islamic Revolution.

"That debt may offer some of the most compelling value in the universe," said David Dowsett, who helps manage US$500 million of emerging-market debt at BlueBay Asset Management in London. He said he isn't buying Iraq's debt because Citigroup Inc acts as the company's prime broker and may be affected by sanctions.