Article

Progress Report on Commercial Bank Debt Restructuring

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
January 1995
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CONSIDERABLE additional progress was made in 1994 and the first half of 1995 in resolving the commercial bank debt problems of developing countries. Debt- and debt-service reduction operations were concluded by Bulgaria, the Dominican Republic, Ecuador, and Poland. Panama announced in May 1995 that it had reached an agreement in principle with its banks. Among low-income developing countries, comprehensive buybacks using resources from the Debt Reduction Facility for International Development Agency (IDA).

Table 1.Commercial bank debt- and debt-service reduction operations 1(million dollars)
CountryDebt

restructured

under DDSR

operation 2

(1)
Debt- and

debt-service

reduction

(DDSR) (2)
Total debt- and

debt-service reduction

as a percentage

of debt restructured

(3) = (2)/(1)
Cost of

reduction 3
Concluded agreements
Albania (1995)385385100.0100
Argentina (1992)19,3979,38648.43,059
Bolivia64361295.261
(1987)47344293.535
(1993)170170100.026
Brazil (1992)40,60013,19832.53,900
Bulgaria (1993)6,1863,52757.0652
Chile (1988)439439100.0248
Costa Rica (1989) 41,4561,12877.5196
Dominican Republic (1993)77651165.8149
Ecuador (1994)4,5222,60257.5583
Guyana (1992)6969100.010
Jordan (1993)73631242.5118
Mexico 451,90222,21442.87,677
(1988)3,6711,67045.5555
(1989)48,23120,54442.67,122
Mozambique (1991)124124100.012
Niger (1991)111111100.023
Nigeria (1991) 45,8114,39375.61,708
Philippines5,8123,70163.71,795
(1989)1,3391,339100.0670
(1992)4,4732,36252.81,125
Poland (1994)9,9896,33263.41,933
Sao Tome and Principe (1994)1010100.01
Sierra Leone (1995) 5148148100.022
Uganda (1993)152152100.018
Uruguay (1991)1,60888855.2463
Venezuela (1990)19,7006,04330.72,585
Zambia (1994)200200100.022
Total170,24375,95144.625,212
Pending agreements
Memorandum
Panama (1995)2,0101,00249.8252
Source: IMF staff estimates.

Debt- and debt-service reductions are estimated by comparing the present value of the old debt with the present value of the new claim, and adjusting for prepayments made by the debtor. The amounts of debt reduction contained in this table exclude debt extinguished through debt conversions. Years in parentheses refer to the date of the agreement in principle.

Excludes past-due interest and includes debt restructured under new money options for Mexico (1989), Uruguay (1991), Venezuela (1989), the Philippines (1992), Poland (1994), and Panama (1995); the Philippines’ (1989) new-money option was not tied to a specific value of existing debt.

Cost at the time of operation’s closing. Includes principal and interest guarantees, buyback costs, and, for Venezuela, resources used to provide comparable collateral for bonds issued prior to 1990. Excludes cash down-payments related to past-due interest.

Includes estimated value-recovery clauses.

Corresponds to the first phase of the buyback.

Source: IMF staff estimates.

Debt- and debt-service reductions are estimated by comparing the present value of the old debt with the present value of the new claim, and adjusting for prepayments made by the debtor. The amounts of debt reduction contained in this table exclude debt extinguished through debt conversions. Years in parentheses refer to the date of the agreement in principle.

Excludes past-due interest and includes debt restructured under new money options for Mexico (1989), Uruguay (1991), Venezuela (1989), the Philippines (1992), Poland (1994), and Panama (1995); the Philippines’ (1989) new-money option was not tied to a specific value of existing debt.

Cost at the time of operation’s closing. Includes principal and interest guarantees, buyback costs, and, for Venezuela, resources used to provide comparable collateral for bonds issued prior to 1990. Excludes cash down-payments related to past-due interest.

Includes estimated value-recovery clauses.

Corresponds to the first phase of the buyback.

Only Countries and from donor countries were completed for Albania, Sao Tome and Principe, Sierra Leone, and Zambia.

As regards debt reschedulings, Russia and its commercial bank creditors agreed in October 1994 on a legal framework for dealing with the country’s bank debt, and payments with respect to interest arrears have been made by Russia into an escrow account at the Bank of England. Algeria reached agreement in principle on a rescheduling arrangement for its commercial bank debt in May 1995. Slovenia, after a complex series of negotiations, reached agreement with the commercial bank creditors of the former Socialist Federal Republic of Yugoslavia on Slovenia’s share of the unallocated debt of the former Yugoslavia, marking an important first step in resolving this difficult debt problem.

Altogether, by end-June 1995, 21 countries had completed deals that restructured commercial bank debts with a face value of $170 billion, obtaining roughly $76 billion in debt reduction in present-value terms at a cost of $25 billion (see Table 1).

Allocations to the options in the various debt packages have differed, reflecting in some cases explicit limits imposed by debtor countries and the views of the holders of the debt regarding the expected future values of the debt instruments issued in exchange for the old bank claims (see Table 2). On the whole, cost efficiency has been achieved in each debt- and debt-service reduction operation concluded thus far, with the cost per unit of debt reduction achieved (the buyback equivalent price) being in line with the secondary market price of the bank claims at the time of the agreement in principle (see Table 3).

Prospects

The sharp run-up in secondary market prices of bank claims during the second half of 1993 and into early 1994 raised concerns that future bank debt negotiations might be complicated by market speculation that a country would conclude a debt- and debt- service reduction operation. As a result, secondary market prices in several instances were not seen to be reflective of the countries’ medium-term capacity to service their debts. In addition, the up-front costs of debt operations (especially straight debt buybacks) were bid up substantially. Subsequent developments (most notably, the rise in world interest rates during 1994 and the Mexican crisis at end-1994) have contributed to large declines in the secondary market prices of developing country bank claims from their early 1994 peaks.

With the adjustment in prices, there is less concern in some cases that high levels of secondary market prices will make it more difficult for countries to reach agreements with their creditors. Nonetheless, despite the general fall in secondary market prices, prices for the debt of many low-income developing countries have remained significantly above their levels in mid-1993 and potentially out of line with the ability of these countries to service debt over the medium term. Speculation prior to the conclusion of a debt- and debt-service reduction deal also remains a potential concern, as evidenced by the run-up in the price of Côte d’lvoire’s debt in advance of discussions between the country and its bank advisory committee in May 1995. Creditors will need to show considerable flexibility in reaching agreements to resolve the debts of these low-income countries, possibly entailing even steeper discounts on debt buybacks than those that creditors have accepted at times in the past.

Even at very steep discounts, the total amount of assistance that a few low-income countries would require to buy back their commercial bank debt far exceeds available resources. In these cases, Brady-type debt- and debt-service reduction operations may have to be considered. Key considerations in structuring such operations will be assessments of the country’s medium-term debt-servicing capacity and the resources available to fund the up-front costs of the operation. The menu of options in such deals may entail, in addition to steep discounts on debt buybacks, sizable discounts on discount bonds, par bonds with interest rates substantially below market levels, the write-off of past-due interest, and the provision of less than full collater- alization of principal on bonds issued as part of the package. To meet the financing requirements for such operations, there will be a continuing need for substantial concessional resources from multilateral institutions and bilateral donors.

This article was derived from Private Market Financing for Developing Countries, prepared by a Staff Team in the IMF’s Policy Development and Review Department, and published in the World Economic and Financial Surveys series. International Monetary Fund. Washington. November 1995.

Table 2.Bank menu choices in debt-restructuring packages(percent of total eligible bank debt)
Other non-

debt- and

debt-service

reduction

options
Debt-service reduction
Debt reductionPrincipal

collateralized

par exchanges
Discount exchangeOther par exchangesNew money
Country-Buyback
Argentina--3466------
Bolivia463519------
Brazil--35325622
Bulgaria1360--27----
Costa Rica63----37----
Dominican Republic3565--------
Ecuador--5842------
Jordan--3367------
Mexico--4347--11--
Nigeria62--38------
Philippines (1989)1100----------
Philippines (1992)28--421713--
Poland255418--4--
Uruguay39--33--28--
Venezuela79381531--
Total 283439595
Sources: National authorities; and IMF staff estimates.

The agreement included new money, but was not tied to a specific amount of eligible debt.

Weighted average.

Not applicable.

Sources: National authorities; and IMF staff estimates.

The agreement included new money, but was not tied to a specific amount of eligible debt.

Weighted average.

Not applicable.

Table 3.Buyback equivalent prices in debt- and debt-service reduction operations 1(percent of face value)
Secondary

market price

at time of

agreement

in principle
Debt-service reduction
Debt reductionPrincipal

collateralized

par exchanges
Discount

exchange
Other par

exchanges
Overall

package
CountryBuyback
Argentina--2532--3037
Brazil--2636193035
Bulgaria2518--81827
Costa Rica 216----29 31819
Dominican Republic2528----2623
Ecuador--1929--2423
Jordan392541--3539
Mexico 2--3339-3644
Nigeria 240--36--3940
Philippines (1989)50------5050
Philippines (1992)52--45284853
Poland411422--2539
Uruguay 256--45--5354
Venezuela 2453538253846
Total4412736213337
Source: IMF staff estimates.

The buyback equivalent price for a debt exchange is the total value of enhancements as a proportion of the total reduction in claims payable to banks, including effective prepayments through col lateralization, evaluated at prevailing interest rates at time of agreement in principle. This is the price at which the debt reduction achieved through a debt exchange is equivalent to the debt reduction under a buyback at this price.

The calculations include estimates of value-recovery clauses.

Weighted average of the buyback equivalent price of the series A par bond (33 cents), the series B par bond (0 cents), and the series A past-due interest bond (119 cents).

Weighted average.

Not applicable.

Source: IMF staff estimates.

The buyback equivalent price for a debt exchange is the total value of enhancements as a proportion of the total reduction in claims payable to banks, including effective prepayments through col lateralization, evaluated at prevailing interest rates at time of agreement in principle. This is the price at which the debt reduction achieved through a debt exchange is equivalent to the debt reduction under a buyback at this price.

The calculations include estimates of value-recovery clauses.

Weighted average of the buyback equivalent price of the series A par bond (33 cents), the series B par bond (0 cents), and the series A past-due interest bond (119 cents).

Weighted average.

Not applicable.

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