Recent Financing Packages

Mexico formally initiated negotiations on a multiyear bank financing package in April 1989; preliminary agreement was reached with the bank advisory committee in July 1989 and the term sheet was issued in September.¹⁰⁴ The package was completed in February 1990 and participating banks allocated 9.2 percent of claims to the new money option, 42.9 percent to the discount bond exchange, and 47.9 percent to the par bond exchange. As a result, bank debt amounting to $7 billion was extinguished outright, while claims of $23 billion were subject to a below market rate of interest of 6.25 percent. This implied a total reduction in the present value of bank claims on Mexico of about $15 billion (about 30 percent of bank debt and 15 percent of total debt). In cash flow terms, the agreement provided for annual debt-service savings equivalent to 0.5 percent of GDP, backdated to July 1, 1989. New money commitments for the period ending in 1992 amounted to $1.1 billion. The cost of the principal and interest guarantees on the new bonds amounted to $7 billion, which was covered by financing received from the World Bank, the International Monetary Fund, and bilateral sources, as well as own reserves.

The Philippines’ bank financing package was agreed in outline in August 1989, and the term sheet was circulated in October 1989. Banks were invited to participate by providing new money in securitized form or to exit through a cash buy-back at a market-related price. The package also provided for waivers to allow for second round debt and debt-service reduction operations, a rescheduling of previous new money disbursements, and a statement of intent by the Philippine authorities to revive the debt-equity conversion scheme. In January 1990, the Philippines completed a buy-back of $1.3 billion of claims (about 20 percent of the eligible stock of bank debt and 5 percent of total debt) at a price of 50 cents per dollar of face value, close to the prevailing secondary market price. This was financed through resources obtained from the World Bank, the International Monetary Fund, and bilateral sources, and from own reserves. The operation provided for a net reduction of external interest payments of about $80 million a year over 1990–92, equivalent to about 0.2 percent of GDP. The other components of the package were signed in February 1990, including new money of $715 million and the rescheduling of about $200 million a year of principal falling due. Discussions on a financing package for 1991–92, which could include debt and debt-service reduction operations, are continuing.

In November 1989, after a lengthy period of negotiation, Costa Rica reached agreement in principle with its bank advisory committee on a package including debt and debt-service reduction and the regularization of arrears, without a new money component. The package was signed in May 1990. In contrast to the cases of Mexico and the Philippines, Costa Rica had made only partial interest payments to banks during the period of negotiation. Banks allocated 62 percent of claims to a buy-back option, while remaining debt was divided evenly between two bond exchanges. As a result, claims of about $1 billion were eliminated outright through the buy-back and cash downpayment on past due interest, while the reduction in interest rates on the bonds was equivalent to additional debt reduction of about $160 million. This implied a total reduction in the present value of bank claims of about 70 percent. These operations required funding of $226 million, which was obtained from bilateral official sources and own reserves.

On June 25, 1990, Venezuela reached agreement with its bank advisory committee on a term sheet including a menu of five options. Four of the five options involve debt or debt-service reduction by means of exchanging eligible debt: (i) through a “buy-back” involving three-month, fully collateralized notes with present value equal to 45 percent of the eligible debt; (ii) at a ratio of 1:0.7 for new bonds with a fully collateralized 30-year bullet maturity, and with a 14-month rolling interest guarantee for the life of the bonds; (iii) at par for new bonds carrying a below market, fixed interest rate of 6.75 percent, with a 30-year bullet maturity, full principal guarantee, and 14-month interest collateral; and (iv) at par for new bonds carrying a temporary, front-loaded reduction in the interest rate, 17-year maturity (including 7 years’ grace), and a 12-month rolling interest guarantee for the first five years. The fifth option involves new money in the form of a 20 percent increase in exposure via the purchase of new money bonds (15-year maturity, including 5 years’ grace), which entitle banks to exchange simultaneously at par eligible debt for noncollateralized “debt conversion bonds” (17-year maturity, including 7 years’ grace) in an amount equal to five times their new money commitment; a portion of the new money bonds entail rights to conversion into equity at par. At least 40 percent of the new money bonds are to be issued by the Central Bank of Venezuela at LIBOR plus ⅞ of 1 percent; the remaining new money bonds would be issued by the Government at LIBOR plus 1 percent. Par and discount bonds feature a value recovery mechanism that takes the form of fully detachable and negotiable oil warrants that give the holder the right to receive increased payments in the event that Venezuela’s oil export price exceeds $26 a barrel on April 15, 1996, or the same price adjusted for inflation thereafter. The agreement elicited virtually 100 percent participation from creditor banks, whose choices resulted in the following allocation of eligible bank exposure ($19.8 billion): 38 percent to the reduced interest par bonds; 31 percent to the new money bonds; 15 percent to the front-loaded interest reduction par bonds; 9 percent to the floating rate discount bonds; and 7 percent to the buy-back option. The buy-back operation (through the exchange of eligible debt for fully collateralized, three-month notes) was implemented on October 18, and final signing took place on December 5, 1990. The package provides an average of about $380 million in net interest savings a year over the period 1991–95, and $1,212 million of new money. The cost of financing the package was $2.6 billion.

The authorities of Chile and the bank advisory committee completed a term sheet on October 5, 1990 that amended previous rescheduling agreements. Although pricing arrangements remained unchanged, the amendment extended the amortization schedules for previously restructured debt and for the 1983–85 new money loans, and also provided for an extension of the retiming periods during which annual interest periods will be maintained, for more flexible provisions enabling Chile to engage in market-based buy-backs and debt exchanges over the next three years, for modifications to allow any amendment or waiver currently requiring approval by 100 percent of the banks instead to require approval by banks having at least 95 percent of the unpaid principal amount under each agreement, and, finally, for an extension of the existing short-term trade-related debt facility through December 31, 1991. The agreement was finalized on December 12, 1990 and covers total maturities of $1.8 billion. In addition, the authorities successfully placed, with a group of twenty banks, $320 million in bonds that was not tied pro rata to existing banks’ exposure.

On November 5, 1990, the authorities of Uruguay and the bank advisory committee agreed on a term sheet for a financing package that includes three main options: a buy-back, a par bond exchange, and new money. Total eligible debt amounts to $1,604 million, or 100 percent of medium- and long-term maturities. The buy-back price was set by Uruguay at 56 cents per dollar of face value. Debt exchanged at par for new bonds carries a fixed interest rate of 6.75 percent, with a fully collateralized 30-year bullet maturity and an 18-month rolling interest guarantee for the life of the bond. The new money option involves a 20 percent increase in exposure via the purchase of new bonds (15-year maturity, including 7 years’ grace, at LIBOR plus 1 percent), which would entitle banks to exchange simultaneously at par eligible debt amounting to up to five times the amount of new money for noncollateralized “debt conversion notes.” Purchasers of fixed rate notes will be entitled to a value recovery clause allowing for larger payments in the event of the favorable performance of an index of Uruguay’s terms of trade, to be calculated on the basis of developments in the export prices of beef, rice, and wool and the import price of oil. Banks which committed to the deal by December 7, 1990 received an early participation fee of ⅛ of 1 percent of their Uruguayan exposure. Available information on the choices submitted by banks indicate the following allocation of exposure: 39 percent to buy-back, 33 percent to the par exchange, and 28 percent to the new money option. The agreement was finalized on January 31, 1991 and the exchanges took place on February 19, 1991. The cost of financing the package is estimated at $461 million. In addition to providing $89 million of new money, implementation of the package is expected to lead to a net reduction of interest payments of about $30 million a year over 1991–95, equivalent to about 0.3 percent of GDP or 1.3 percent of exports of goods and nonfactor services.

On December 1, 1990, Colombia and the steering committee of its commercial bank creditors reached agreement in principle on a new refinancing package. The preliminary agreement consists of a syndicated loan for $1,775 million to refinance about 93 percent of principal payments falling due to banks during 1991-94. The package would include two facilities: a basic loan and two series of floating rate notes. The basic loan (“integrated loan facility”), which would amount to $1,575 million, would have a 12½-year maturity and a spread of 1 percentage point over the 6-month LIBOR. Disbursements would take place semi-annually and would be front-loaded to correspond to the present amortization schedule. In addition, there is an early participation fee of ½ of 1 percentage point. The floating rate notes would bear an interest rate of 1½ percent over the 6-month LIBOR, with a 5-year repayment period and 2 years’ grace. The first series, amounting to $100 million, would be issued in 1991-92, while the second series, for a similar amount, would be issued in 1993-94. By the early participation deadline of January 17, 1991, 95 banks had confirmed their participation, accounting for 97 percent of the total package.

After reaching an agreement in principle in October 1989, Madagascar and its bank creditors signed a final agreement in April 1990. Under the agreement all principal falling due on December 15, 1989, and half the principal falling due in 1990-93 (totaling about $21 million) have been rescheduled with a 9-year maturity period, including 3½ years’ grace. The agreement also allows for debt buy-backs, subject to the restriction that buy-backs of more than $5 million a year of debt (face value) must be undertaken with concessional funds provided specifically for that purpose. Two months later, in June 1990, a rescheduling agreement was signed between Jamaica and its bank creditors. It covers some $330 million of claims, which are rescheduled for periods up to 14½ years, and provides for a reduction in the spread from 1¼ percent over LIBOR to 13/16 of 1 percent, while allowing for buy-backs of up to $35 million annually. On September 28, 1990, Senegal and its commercial bank creditors concluded an agreement to reschedule maturities for an amount of $37 million, comprising most of the country’s commercial bank debt and to provide flexibility for future buy-back operations and debt-equity conversions.

On January 14, 1991, Niger and its commercial bank creditors reached a preliminary agreement on a debt and debt-service reduction package, which would be the first to involve official funding from the Debt Reduction Facility of the International Development Agency (IDA). The agreed package covers approximately $110 million of bank debt under two options, the first involving the exchange of claims for 60-day notes with a face value equivalent to 18 percent of the outstanding principal amount of the debt, the second involving the exchange of claims at par for 21-year, non-interest-bearing notes. The principal on these notes is to be guaranteed by zero-coupon bonds purchased by the Banque Centrale des Etats de l’Afrique de l’Ouest (BCEAO), with their net present value estimated at around 18 cents to the dollar. The operation has been structured to involve a novation, that is, the substitution of a new contract, debt or obligation for an existing one, between the same or different parties, in order to avoid the invocation of sharing clauses by nonaccepting banks. The package is to be financed by grants from the IDA facility, France, and Switzerland. To simplify processing the offer, the two options will be mutually exclusive; that is, banks will not be able to split their claims between the short- and long-term note exchange.

Finally, on March 2, 1991, Nigeria and the steering committee of its commercial bank creditors agreed in principle on a financing package including three options: a buy-back, a par exchange for registered bonds, and new money. Total eligible debt amounts to $5.8 billion. Debt exchanged at par for the new registered bonds would carry a fixed interest rate of 6.25 percent with a fully collateralized 30-year bullet maturity and a 12-month interest guarantee. The new money option involves the exchange of existing debt for registered bonds and the provision by banks of new loans equivalent to 10 percent of the amount of exchanged debt. The agreement also provides for the payment of some $300 million in arrears accumulated since March 1990.

Debt Conversion Programs

The amount of debt extinguished through official ongoing debt conversion programs rose to an estimated $10.3 billion in 1990 (Table 16), largely reflecting the privatization of two state-owned enterprises in Argentina. The $3.1 billion increase compared with 1989 brought the total volume of debt conversions past the previous peak of $8.3 billion reached in 1988. In a number of countries, the pace of debt conversions had slowed in recent years as conversion programs were curtailed in the face of concerns about the domestic liquidity implications of such operations, the additionality of associated investment, and pricing (Table A35). Conversion activity has revived recently, however, and may be expected to continue to be strong for several countries in the period ahead, reflecting new commitments under bank financing packages and accelerated efforts to attract foreign investment.

Table 16.

Debt Conversions, 1985-90¹

(In millions of U.S. dollars)

Sources: Central Bank of Argentina; Central Bank of Brazil; Central Bank of Chile; Mexico, Ministry of Finance; Central Bank of Philippines; Bank of Jamaica; Central Bank of Venezuela; and Fund staff estimates.

¹ Face value of debt converted under official ongoing schemes. Figures do not include large-scale one-off cash buy-backs and debt exchanges.

² As of June 30, 1990.

³ As of September 30, 1990.

⁴ Does not include an estimated $6-8 billion related to prepayment at a discount of private sector debt since August 1987 signing of an agreement to restructure FICORCA debt.

⁵ Includes partial data for some countries.

Table 16.

Debt Conversions, 1985-90¹

(In millions of U.S. dollars)

		1985	1986	1987	1988	1989	1990
Argentina		469	—	—	764	1,180	6,670
Brazil		537	176	336	2,095	942	2922
Chile		323	974	1,997	2,927	2,767	1,100
Costa Rica		—	7	89	44	124	17
Ecuador		—	—	127	261	31	58
Honduras		—	—	9	14	47	32
Jamaica		—	—	4	5	16	93
Mexico		—	413	1,680	1,0564	532	652
Nigeria		—	—	—	70	304	1573
Philippines		—	81	451	931	630	630
Uruguay		—	—	—	104	53	—
Venezuela		—	—	45	49	544	716
	Total	1,329	1,651	4,738	8,320	7,170	10,3335

Sources: Central Bank of Argentina; Central Bank of Brazil; Central Bank of Chile; Mexico, Ministry of Finance; Central Bank of Philippines; Bank of Jamaica; Central Bank of Venezuela; and Fund staff estimates.

¹ Face value of debt converted under official ongoing schemes. Figures do not include large-scale one-off cash buy-backs and debt exchanges.

² As of June 30, 1990.

³ As of September 30, 1990.

⁴ Does not include an estimated $6-8 billion related to prepayment at a discount of private sector debt since August 1987 signing of an agreement to restructure FICORCA debt.

⁵ Includes partial data for some countries.

View Table

Table 16.

Debt Conversions, 1985-90¹

(In millions of U.S. dollars)

		1985	1986	1987	1988	1989	1990
Argentina		469	—	—	764	1,180	6,670
Brazil		537	176	336	2,095	942	2922
Chile		323	974	1,997	2,927	2,767	1,100
Costa Rica		—	7	89	44	124	17
Ecuador		—	—	127	261	31	58
Honduras		—	—	9	14	47	32
Jamaica		—	—	4	5	16	93
Mexico		—	413	1,680	1,0564	532	652
Nigeria		—	—	—	70	304	1573
Philippines		—	81	451	931	630	630
Uruguay		—	—	—	104	53	—
Venezuela		—	—	45	49	544	716
	Total	1,329	1,651	4,738	8,320	7,170	10,3335

Sources: Central Bank of Argentina; Central Bank of Brazil; Central Bank of Chile; Mexico, Ministry of Finance; Central Bank of Philippines; Bank of Jamaica; Central Bank of Venezuela; and Fund staff estimates.

¹ Face value of debt converted under official ongoing schemes. Figures do not include large-scale one-off cash buy-backs and debt exchanges.

² As of June 30, 1990.

³ As of September 30, 1990.

⁴ Does not include an estimated $6-8 billion related to prepayment at a discount of private sector debt since August 1987 signing of an agreement to restructure FICORCA debt.

⁵ Includes partial data for some countries.

The Government of Argentina has sharply stepped up the pace of debt-equity conversions as it seeks to privatize and recapitalize the country’s state-owned enterprises. Initial efforts focused on the sale of the telephone company, Entel, and the state airline, Aerolíneas Argentinas, the fourth and fifth largest state-owned enterprises. Entel, which was auctioned as two separate entities (Telnor to operate in the northern part of the country and Telsur to operate in the south), was sold to two consortiums for a total of $214 million in cash and $5.03 billion in Argentine foreign debt certificates. In addition, the purchasers committed some $5 billion in capital improvements over the next ten years. Aerolíneas Argentinas was sold for $260 million in capital, half up-front and the remainder over five years, $2 billion in debt and a commitment to $700 million in capital improvements over a seven-year period. In both cases, finalization of the sale was dependent on obtaining necessary waivers from commercial banks. In the case of the Telnor purchase, delays in assembling commited debt instruments resulted in the original consortium losing its acquisition rights. The rights were awarded to a third consortium on the same terms as the previously accepted offer. The privatization effort was expanded in October 1990 with the passage of a decree establishing a framework for the sale of a number of other companies, as well as for granting concessions in the operation of the national electricity and gas companies. In response to these initiatives, the formation of the Argentine Private Development Trust was announced in April 1990. The fund manages $1.2 billion in Argentine debt claims, which are to be converted into shares of privatized Argentine companies. Participating banks, which include Argentine, Asian, European, and U.S. banks, subscribe to the fund by contributing Argentine claims.

Mexico, which suspended its debt-equity conversion program in 1987, announced regulations for a new debt-equity system in March 1990. Under the 1990 financing package with commercial banks, the Mexican authorities committed to introduce a new program that would allow for the conversion of $3.5 billion of existing bank claims (original face value). Auctions were held in July and October 1990. In the first auction, 27 of 359 offers were accepted for $1 billion of claims. The lowest successful bid, which determined the auction price for all successful bidders, was for a discount of 52 percent. In the second auction the authorities exercised their right to increase the offered amount of conversion rights beyond the initially-specified $1.5 billion in view of the attractiveness of the offers. As a result, an additional $1 billion of debt was accepted, bringing the total in the two exchanges to $3.5 billion and establishing a discount of 52 percent. The book value of the reduction in the debt stock would be $2.6 billion against which $1.7 billion of swap rights would be issued. Successful bidders were required to deposit claims equivalent to 5 percent of the rights acquired, with the remainder to be paid within 18 months. Under the regulations, eligible investments are to be limited to approved infrastructure projects and up to 50 percent of the cost of privatization purchases.

In 1989, Venezuela introduced a number of changes to its debt-equity program, including establishment of an auction-based mechanism to replace the administered pricing and allocation mechanisms of the previous program. Auctions were initially held on a monthly basis with an annual ceiling on conversions. Successful bidders, having placed a 5 percent deposit at the outset of the process, received a nontransferable, nonnegotiable right, valid for 60 days, to effect a conversion of the tendered bid at the bid discount. In the second half of 1990, the authorities progressively moved to emphasize debt-equity conversions involving large investment projects in selected sectors (particularly petrochemicals and aluminum) at administratively determined discounts. In November and December 1990, a series of decrees were issued establishing norms applicable to large projects.¹⁰⁵ Following completion of the bank-debt restructuring agreement at the end of 1990, the pace of debt conversions, which had fallen off sharply, was expected to pick up once again. As of February 1991, the authorities had already approved nine investment projects in the petrochemical sector, involving a total investment of $2.6 billion, of which $0.6 billion was to be financed through debt-equity swaps. Under the terms of the restructuring agreement, Venezuela is committed to maintaining a program of debt conversions of at least $600 million (discounted value) a year during 1991-93.

The debt converted by the Philippines in 1990 was largely associated with privatization operations under debt-for-asset schemes. In line with announcements made at the time of the 1989 bank debt restructuring agreement, the authorities introduced a new auction-based system for debt-equity conversions in December 1990. The new program specified that conversion rights for central bank debt with a face value of $300 million a year would be auctioned on a quarterly basis over a three-year period. The number of sectors eligible for investment under the scheme was reduced from nine to four: bank privatizations and export, energy, or agricultural ventures. The Philippines held its first auction of conversion rights under the new system on February 20, 1991; it was fully subscribed and discounts ranged from 50 percent to 55 percent.

The pace of conversions for Chile, accounting for the largest portion of commercial bank debt extinguished through official ongoing debt conversion operations, fell off sharply in 1990 as discounts became more limited and eligible debt stocks declined. Conversions under Chapter 18 of the country’s foreign exchange regulations, which the authorities began to limit during 1989 in response to concerns about domestic liquidity, recovered to around $0.6 billion in 1990, after having fallen by $0.5 billion to $0.4 billion in 1989.¹⁰⁶ A substantial decline was observed in foreign investment related conversions under Chapter 19, down to $0.4 billion from $1.9 billion in 1989.

The bank restructuring agreements for a number of other countries also contained commitments to engage in debt-equity swaps. In Costa Rica, the Government committed to retire up to $20 million of debt a year over a five-year period. Uruguay committed to converting 30 percent of the new money bonds issued under its 1991 restructuring agreement into equity at par over the next three years. In late 1989, Nigeria expanded its debt conversion scheme to include restructured bank debt, in addition to restructured debt, in the form of promissory notes, owed to foreign suppliers; the scheme was suspended in October 1990, but reactivated in January 1991.

The resurgence of such debt-equity programs has been accompanied by increased interest in other forms of conversions, particularly debt-for-nature and debt-for-development swaps. These operations have tended to take the form of acquisition of debt, through purchases by charitable organizations at a discount on the secondary market, which are then converted into local currency instruments, often at par and generally at a discount less steep than that prevailing in the secondary market. In some instances, banks have donated debt to charitable groups. Such operations effectively involve two expenditure components for the host country’s public sector: a buy-back of debt intermediated by the charitable organization; and a contribution to a given project’s financing, which is commensurate with the differential between the discounts obtained by the charitable organization in the secondary market and that applied when the debt is converted into local currency. In addition, the project may entail future recurrent expenditures for the host country’s public sector. As detailed in previous reports in this series, such programs were established in Bolivia, Costa Rica, Ecuador, and the Philippines in 1987-89. A number of other countries have subsequently established similar programs. Several programs were launched or expanded during 1990. The Dominican Republic initiated a four-year program to convert up to $80 million into nature conservation funds in March 1990. In Argentina, a program was introduced under which up to $60 million in debt could be exchanged to finance local environmental groups. Ecuador set the maximum amount of debt conversions under similar schemes to $150 million, and the coverage of the program was widened to allow for local currency proceeds also to be used for agriculture and other social projects. Similar programs are underway or under consideration in a widening range of countries.