Killing it like a hooker in Hong Kong

Bonds and the Political Economy: Bulletproofing

This is a game I’ve seen several times in emerging markets.

Entrepreneur raises money from private funds and takes over a large business which depends on a regulated government market. It could be utilities, energy, even tobacco or financial firm or bank.

Having taken over the company, he then quickly does a refinancing, inviting government pension funds and state connected banks to lend to his firm, even if it does not need the money.

He usually realizes very little savings in the refinancing or even ends up with a higher cost, because the original funding would have been USD based, while the refi would be local currency based.

Now the key factor in many of these deals is this: they ignore political or regulatory risk that scares away other potential bidders, allowing the entrepreneur to buy assets much cheaper than expected.

Why does this happen? Well firstly, the aforesaid entrepreneur is usually well connected politically, but often only as much as a good lobbyist would be.

More often, the local borrowings strategy is used to spread the political risk to the masses.

Good example is Malakoff, YTL and the other large Malaysian independent power producers. The IPPs got sweetheart deals in the 90s, and Tenaga Nasional has been trying to renegotiate these deal forever. The Malaysian government in 2008 threatened to change the payment formula but met with a chorus of opposition from: you guessed it: the government pension fund.


This is a lesson for any industry which is profitable and highly regulated. ISSUE BONDS. Get the institutions which protect pensioners investing in you, and you have a highly motivated political bench taking care of you.


Looking at the US, which industry is the biggest issuer of bonds: the finance sector obviously. This is one reason why financial institutions had to be bailed out by the taxpayer. Because you could either spread the pain to the taxpaying population, which by definition is still earning, or devastate the savings of the retirees, who would have taken the hit had you crammed down losses on the bondholders.


October 14, 2010 - Posted by | Uncategorized | , , , ,


  1. The beautiful thing is that this “conundrum” is an illusion. In reality, cramming dowm losses to bondholders would benefit MORE the average retiree because (s)he is less leveraged than the top 1% income earners. Therefore it would be in better position of buying high yielding assets post crash.
    Same thing applies to your Malaysian case by the way : what the pensioners gain on one side, they lose more through higher energy prices and lower dividends from Tenaga.

    Another version of “what is seen, and what is not seen” I guess…

    Comment by charles | October 14, 2010

  2. Absolutely. Just goes to show that aversion to loss is weighted far more than rational expectations theory would predict. People fear losing a dollar more than they want to gain a dollar.

    Comment by vanderghast | October 14, 2010

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