Kim Jong-il and you

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When is a dictator’s death good for your pension? When that dictator is Kim Jong-il. Here’s how.

According to Andrew Chappell of Exotix, the frontier markets specialists, a number of blue chip institutional investors are holders of North Korea’s (admittedly tiny stock of) foreign debt. That means that if – as Exotix hopes and believes – those investments pay off, you, dear reader, could be quids in.

Chappell told beyondbrics: “[I'm] willing to bet that people reading your article will, through their funds, already be invested in North Korea.”

Chappell said the price of North Korean debt had been edging up since the announcement of Kim Jung-il’s death on Monday as investors believed the chances of making an enormous profit had increased. In a best case scenario, he says, the price will really take off.

North Korea took out four syndicated loans in 1977 worth, in total, about 1bn Deutsche marks – the loans are still denominated in D-marks but would be settled in euros at the euro creation rate of Dm1.95583 to the €1.

North Korea, unsurprisingly, defaulted on those loans in 1984 and, because they have been in default for so long, unpaid interest has really mounted up.

The total amount due depends on the individual contract. Some apply a default penalty rate of, say, an additional 1 per cent while others might calculate the interest in a compound fashion.

Chappell estimates the past due interest is now running at a whopping 300 – 600 per cent. For the sake of future calculations, lets split the difference and call it 400 per cent.

Now consider that, currently, North Korean debt is trading at 14 – 18 cents on the dollar, up from 13-15 cents last week. That means an investor could buy $1m of North Korean debt for roughly $160,000.

Of course, that investor would be taking a massive gamble as there is absolutely no guarantee that North Korea will meaningfully re-engage with the international community.

However, as Chappell said, North Korean paper exists as “an enormous option” which has a reunification of North and South Korean at its heart.

Chappell told beyondbrics his estimate puts North Korea’s total external debt at $18bn and the cash reserves of South Korea at $304bn. In other words: “North Korea’s external debt is, at most, equal to 6 per cent of South Korea’s dollar reserves.”

“In the best case scenario, this change of leadership could lead to reunification”, said Chappell. And that would make North Korean debt very valuable indeed as “if there is reunification… there is a very high chance that the South Koreans would repay the North Korean debt in its entirety.”

In that best case scenario of reunification and repayment, holders of North Korean debt could make 25 times their initial investment. So a gamble of $160,000, for example, could yield $4m. The longer you can wait, of course, the greater the chance of a payout.

Sadly, therefore, this type of gamble is only really open to institutional investors. It is an extremely illiquid market and the average deal size is near $5m says Chappell. He was not willing to reveal the current holders of the paper, though he did assure beyondbrics there were some “very blue chip investors” in the mix.

Related reading:
North Korea A peninsula of perils, FT
Profile Kim Jong-eun, FT
Kim Jong-il A life in pictures, FT
Obituary Tyrant capable of deft brinkmanship, FT
Global Insight Death could trigger wider Sino-US power play, FT
Comparing the Koreas – Graphic of the Day, Reuters

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