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Maverick Investor Tests Default-Free Streak in Riskiest Bet Yet

(Bloomberg) -- For the third time in six months, British billionaire Mark Coombs is betting on bonds that many on Wall Street deem destined for default.

Ashmore Group Plc, the $98 billion money manager led by Coombs, has been piling into Lebanon notes due March 9 just as many of its rivals warn a missed payment is all but certain. The firm boosted its holdings to more than 25% of the $1.2 billion of bonds, enough for a blocking stake if there’s a restructuring.

Last week, an Ashmore representative visited Beirut to discuss the payment with senior officials, according to people familiar with the matter. Coombs and Jan Dehn, a spokesman at the firm, declined to comment. Officials at Lebanon’s finance ministry and central bank didn’t respond to requests for comment.

The Lebanon gambit puts Ashmore in the middle of another potentially large and politically charged restructuring, one that sparked a local investigation and condemnation from President Michel Aoun after Lebanese banks unloaded some of their bonds to Ashmore. The firm has bought up so many notes maturing this March, April and June that it can reject potential restructuring proposals backed by other creditors. The 59-year-old Coombs, meantime, is one of the investors behind a lobbying push to get paid on defaulted Venezuela bonds, enlisting the same public affairs team that worked for hedge fund billionaire Paul Singer.

“Ashmore can play hardball but given their important role here, it’s in their interest to facilitate an orderly outcome,” said Adel Afiouni, a former Lebanese minister, who’s encouraging the government to default. “An orderly restructuring should be more important for Ashmore in the long run than just getting fully paid on the March bonds.”

The note maturing March 9 inched lower on Wednesday, approaching a record low it touched earlier this week. The security currently trades at about double the value of longer maturities, reflecting the higher chance of repayment.

Stellar Record

The London-based firm could redeem itself if Lebanon repays the March debt and others due later this year. Several factors point in its favor. For one, the nation has a spotless record: Zero defaults since independence in 1943. Earlier this year, central bank chief Riad Salameh signaled Beirut’s desire to pay, proposing a debt swap with local bondholders, while Prime Minister Hassan Diab had expressed support for honoring the nation’s 2020 obligations.

“Ashmore’s bet is that Lebanon has been rescued in the past and they’ll get rescued again,” said Carmen Reinhart, an economist at Harvard University and former deputy director of the International Monetary Fund’s research department. “It’s not about their exceptionalism for abiding by contracts.”

Still, there’s mounting pressure from Lebanese politicians and even some creditors to default and save the country’s dwindling reserves for imports of food and medicine. The nation met $71 million in interest payments due Wednesday, according to a government official.

While pundits have cautioned about unsustainable debt levels for more than a decade, such warnings reached fever pitch this past year as Lebanon failed to carry out measures to fix its ailing power sector, reduce its budget deficit and tackle corruption in exchange for funding. Regional political tensions have also caused diaspora inflows to shrivel.

Big Blunders

If Lebanon defaults, it would be the latest in a series of high-profile blunders for Ashmore. In August, the firm hung onto Argentine notes as they tumbled following Alberto Fernandez’s upset win in the presidential primary. Soon after, bets on Ecuador and Lebanon suffered as protests swept Quito and Beirut. The dagger came in late October when a wager on bonds from Venezuela’s state oil company went awry as it went into default.

“We’ve seen multiple countries sell off: Argentina, followed by Ecuador, followed by Lebanon,” said Haley Tam, a London-based analyst at Credit Suisse Group AG who has covered Ashmore for more than a decade. “If an investment strategy keeps tripping up again and again, that surely takes its toll.”

A Double Whammy Stings Big Bond Funds Betting on Latin America

Those struggles stray from Ashmore’s track record of winning wagers. One of its successful strategies has been snatching up high-yield notes shortly before maturity. Ashmore’s $5.9 billion Emerging Markets Short Duration Fund has beaten 90% of peers over the past five years, according to data compiled by Bloomberg. The company’s stock has returned 85% in dollar terms during that span, surpassing both the S&P 500 Index and the MSCI Emerging Market Index. Plus, investors inflows surged by $3.3 billion in the final quarter of 2019.

In the past year, though, the short duration fund slumped 6.6%, falling to the back of the pack. Ashmore’s Lebanon bet isn’t helping: The March 2020 bonds have slid to 54 cents on the dollar, from 87 cents at the start of the year.

Billionaire CEO

Coombs’s fortune surpasses $2 billion, according to the Bloomberg Billionaires Index. One of the U.K.’s richest financiers, Coombs has kept a low profile, even as his net worth swelled. After studying law at the University of Cambridge, he joined the Latin America desk at Grindlays Bank in 1983, which later became Australia and New Zealand Banking Group Ltd. In 1999, Coombs led Ashmore’s buyout from the Melbourne-based bank.

In the ensuing two decades, his firm has branded itself as a buy-and-hold investor that weathers sell-offs and avoids the sort of litigation undertaken by hedge fund rivals. But Ashmore’s recent moves suggest that may be changing.

Late last year, the firm snatched up just enough Lebanon bonds maturing in March, April and June 2020 to hold a blocking stake, increasing its leverage over other investors. And since PDVSA’s default on the 2020 notes, Ashmore has been pushing for repayment, even as the nation remains in crisis.

LEBANON INSIGHT: 1,000% Yield Fires Starting Gun on Debt Default

Lebanon’s tumultuous past week has all the signs of another nation teetering toward the edge. Its credit-default swaps surged to a record high, data compiled by Bloomberg show. Two of the three major rating companies downgraded Lebanon deeper into junk territory. Senior officials have also hinted at the risk of a missed payment: Parliament Speaker Nabih Berri said the best solution to the financial crisis is a restructuring, while Diab’s government has turned to the IMF for help and hired debt advisers.

“Lebanon is like Venezuela all over again,” Reinhart said. “What can you say but good luck.”

(Updates prices in sixth paragraph, adds coupon payment in ninth.)

--With assistance from Ben Stupples and Pierre Paulden.

To contact the reporters on this story: Ben Bartenstein in New York at bbartenstei3@bloomberg.net;Dana Khraiche in Beirut at dkhraiche@bloomberg.net

To contact the editors responsible for this story: Carolina Wilson at cwilson166@bloomberg.net, Alec D.B. McCabe, Paul Wallace

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