Chapter

IV Recent Trends in Bank Restructuring

Author(s):
Donald Mathieson, Eliot Kalter, Maxwell Watson, and G. Kincaid
Published Date:
February 1986
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General

Successful restructuring of countries’ bank debt has continued to demand intensive coordination among banks, governments, the Fund, and other multilateral agencies on the financial requirements associated with adjustment programs, and continuous liaison by the coordinating banks with all creditor banks to secure agreement on the restructuring packages. Almost all restructurings have been linked to a Fund-supported adjustment program. A detailed discussion of current trends in bank debt restructuring is contained in Recent Developments in External Debt Restructuring.27 This section summarizes key points from that study, and updates the statistics and description of developments.

While the basic approach to solving debt-servicing problems has been maintained from the outset of the debt problem, more recently, creditors have been willing to enter into longer-term arrangements with a number of countries. To this end, debtor countries and banks have negotiated MYRAs. However, for some countries engaged in debt-restructuring negotiations, the process has been complex and slow, especially where agreement on new financing has been sought. In some cases, final agreements have yet to be signed, despite prolonged negotiations.

The type of debt included in bank debt has reflected a number of factors. One major consideration has been a concern to achieve equitable burden-sharing among banks, which has involved securing agreement from all of a country’s creditor banks. Another important consideration has been to minimize the potential danger to restructuring countries’ prospects of regaining access to international capital markets. Therefore, interest payments on bank debt have been excluded from reschedulings in almost all cases, although banks have been willing, in some cases, to reduce the interest rate on existing loans; formal restructuring of trade credits and interbank deposits has been avoided whenever feasible; and bonds and floating rate notes owned by nonbanks generally have been excluded from restructuring, in part, because their holders have not normally been known.

A further concern has been burden-sharing among bank and official creditors; thus, agreements with bank creditors, at times, were made contingent on comparable debt relief from official creditors. Official creditors, for their part, conditioned further debt relief on debtor countries seeking debt restructuring by banks on comparable terms. With one exception, each instance of official rescheduling during the past two years has been preceded or followed by parallel discussions on bank debt restructuring. In the single exception, there was no medium-term debt to banks. Banks, on the other hand, have restructured debt for some countries that did not seek a multilateral rescheduling from official creditors.

In addition to restructuring debt owed or guaranteed by the debtor government, a number of debtor countries encouraged the restructuring of nonguaranteed private debt in order to regularize the private sector’s relations with creditors, and to secure additional balance of payments relief. In several of such cases, governments introduced preferential exchange rate schemes, and sometimes special domestic credit arrangements to induce the private sector to reschedule its debts. Also, interest payments on rescheduled debts were sometimes given priority under an exchange allocation system. In some cases, banks have pressed countries’ authorities to assume or mitigate the commercial risk of their loans to the private sector.

Amounts and Terms

In 1984, restructuring agreements were reached (at least in principle) by 17 countries, compared with 14 countries in 1983, and an average of 6 countries a year during 1980–82. During 1985, 8 countries signed restructuring agreements. The amounts of debt restructured in agreements signed or agreed in principle, excluding short-term debt rolled over, are estimated to have been $98 billion in 1984, about three times the amount in 1983, and $13 billion during 1985.28 The amount rescheduled in 1984 was equivalent to almost 20 percent of the stock of bank debt of developing countries compared with 6 percent in 1983.

Under arrangements concluded in the context of all bank debt restructurings, an estimated $38 billion of short-term debt was rolled over or converted into medium-term debt in 1984–36 percent more than in 1983. These arrangements affected trade-related, interbank, and money market facilities in 12 countries. During 1985, the covered amount increased only slightly, as banks raised facilities in only two countries—Costa Rica and Panama. Details on amounts of debt restructured, rollover arrangements, and concerted lending are contained in Tables 3640.

Between September 1984 and June 1985, banks signed or reached agreement in principle on MYRAs with Mexico, Venezuela, Ecuador, the Dominican Republic, Jamaica, and Yugoslavia (Table 12). These agreements cover $75 billion of principal repayments due between 1983 and 1990. Preliminary agreement was also reached on a MYRA with Yugoslavia. For the countries involved, the MYRAs provided considerably longer consolidation periods and maturities of up to 14 years, compared with 10 years in typical recent debt restructurings. Spreads in some cases were fixed at ⅞ percent to 1¼ percent over LIBOR, significantly below the spreads in other recent debt restructurings, and rescheduling fees were waived.

Recent agreements with other countries that had previously undertaken debt restructurings and are implementing economic adjustment programs show a narrowing of spreads, and a lengthening of grace periods and maturities, compared with earlier agreements. This trend has been clearest in the case of MYRAs, but a number of other recent agreements show spreads of 1¾ percent or less over LIBOR—considerably lower than was generally the case in the first year after widespread payments difficulties emerged in late 1982. In the case of Chile, for example, the interest rate in the 1983 rescheduling arrangement was 2–2⅛ percent over LIBOR, while the 1985 arrangement includes a spread of 1⅜ percent over LIBOR. In addition, in certain cases, creditor banks have been willing to alter the schedule for interest payments (e.g., semiannual instead of quarterly payments).

Maturities of restructurings, other than MYRAs, have recently ranged up to 10 or 12 years, compared with typical maturities during 1982–83 of up to 8 years. For example, the maturity of Chile’s debt in the 1983 rescheduling was 8 years, while the recently signed 1985 arrangement calls for a 12-year maturity. Grace periods, too, have been lengthened, from typically 3 years during 1982–83, to more recently as long as 5 years. While these terms are still less favorable than the average terms recorded for all new publicized longterm international bank credit commitments to developing countries, the differences have narrowed.

Where no improvement in economic performance has been apparent, or where the country has been unable to fulfill the terms of an existing restructuring agreement, banks on occasion entered into deferment agreements that have been periodically renewed. For some countries that experienced extremely protracted payments difficulties, banks have also been prepared to stretch out repayment terms over a relatively long period and, in a very few cases, have rescheduled or formally deferred a portion of interest payments (notably in Nicaragua and Sudan). However, in such cases, there has been no provision of new medium-term financing by banks, and banks have considered that there was little prospect of an early return by the countries to normal access to capital markets.

Multiyear Restructurings and Enhanced Surveillance

Multiyear Restructuring Agreements

The most significant new development in bank debt restructurings during 1984–85 was the adoption by bank creditors of a medium-term perspective for debt restructuring through the negotiation of MYRAs with certain countries. In all cases, MYRAs have been seen to provide a clearer planning horizon for bank creditors, as well as the government.

In several cases, MYRAs were intended to facilitate an early return by debtor countries to more normal access to capital markets, that is, to move away from a concerted approach to new lending and to re-establish independent decision making by market participants. In such cases, banks sought economic monitoring procedures for the period when countries would no longer be using Fund resources. In this context, the concept of enhanced surveillance by the Fund was developed (enhanced surveillance is discussed further in the following subsection).

MYRAs have also been agreed or discussed with countries that would not meet the criteria for enhanced surveillance, mainly because they have not established an adequate record of adjustment. In certain such cases, member countries and bank creditors have agreed on a multiyear restructuring to avoid the burdens and uncertainties imposed by multiple annual restructurings.

In order to maintain a close link between debt relief and the implementation of adjustment policies, bank creditors have in some cases made only subperiods within the consolidation period of a MYRA eligible for unconditional restructuring. The restructuring for later years in the consolidation period depends on certain conditions being met with regard to economic performance and monitoring arrangements. This approach, known as a serial MYRA, facilitates a periodic review of economic policies and prospects.

Table 12.Terms of Selected Bank Debt Restructurings and Bank Financial Packages 1983–September 1985
CountryYear of AgreementType of Debt RestructuredGrace Period (In years)Maturity (In years)Interest Rate (In percent spread over LIBOR - U.S. Prime)
Argentina1983New financing32¼–⅛
1985Restructuring310 to 121⅜–1⅜
1985New financing3101⅝–1¼
Brazil1983Restructured182¼–22
1983New financing82⅛–1⅞3
1984Restructuring592–1¾
1984New financing592–1¾
Chile1983New financing472¼–2⅛
1983Restructuring482⅛–2
1984New financing591¾–1½
1985Restructuring46121⅜
1985New financing101⅜–1¼
Costa Rica1983Restructuring6½ to 7½2¼–2⅛
1985Restructuring3101⅝–1⅝5
Dominican Republic1983Restructuring152¼–2⅛
1985Restructuring63131⅜
Ecuador1983Restructuring172¼–2⅛
1983New financing62⅛–2¼
1984Restructuring63121⅜
1984New financing2101⅝
Jamaica1984Restructuring25
1985Restructuring37101⅞
Mexico1983Restructuring481⅞–1¾
1983New financing362¼–2⅛
1984New financing101½–1⅛
1985Restructuring60 to 114⅞ in 1985–86
1⅛ in 1987–91
1¼ in 1992–98
Philippines1984Restructuring4 to 5101⅝
1984New financing59
Venezuela1984Restructuring612½1⅛
Yugoslavai1983Restructuring361⅞–1¾
1983New financing361⅞–1¾
1984Restructuring471⅝–1½
1985Restructuring65111⅛
Sources: Restructuring agreements; and press reports.

First principal payment due 30 months after rescheduling.

The spreads over LIBOR/U.S. prime rate are 2⅛ percent/l⅞ percent for amounts on deposit with the Central Bank or—as generally acceptable maximums—for loans to public sector borrowers with official guarantee, Petrobras, and Companhia Vale do Rico Doce (CVRD); 2¼ percent/2 percent as the generally acceptable maximums for public sector borrowers without official guarantee, private sector borrowers with development bank guarantee and for commercial and investment banks under Resolution 63: 2½ percent/2¼ percent as generally acceptable maximums for private sector borrowers.

The Central Bank stands ready to borrow the committed funds at either 2⅛ percent over LIBOR or 1⅞ percent over U.S. prime rate. For loans to other borrowers, the spreads agreed must be acceptable to the Central Bank, which indicated the following máximums for spreads over LIBOR/U.S. prime rate to be generally acceptable: public sector borrowers with official guarantee as well as Petrobras and CVRD—2⅛ percent/1⅛ percent; public sector borrowers without official guarantee, private sector borrowers with development bank guarantee, and Resolution 63 loans to commercial and investment banks—2¼ percent/2 percent; private sector borrowers, including multinationals—2½ percent/2½ percent. Brazil is also prepared to pay a 0.5 percent commitment fee on undisbursed commitments, payable quarterly in arrears, and a 1.5 percent flat facility fee on amounts disbursed, payable at the lime of disbursement.

Agreement in principle of restructuring of public and private debt due in 1985–87.

1⅝ percent over “domestic reference rate,” equal to: U.S. dollar certificate of deposit rate adjusted to reserves and insurance: or a comparable yield for loans denominated in other currencies.”

Multiyear debt restructuring agreement.

The repayment schedule is 4 quarterly payments of $1 million starting October 15, 1988 with the remainder to be paid in 25 equal quarterly installments.

Sources: Restructuring agreements; and press reports.

First principal payment due 30 months after rescheduling.

The spreads over LIBOR/U.S. prime rate are 2⅛ percent/l⅞ percent for amounts on deposit with the Central Bank or—as generally acceptable maximums—for loans to public sector borrowers with official guarantee, Petrobras, and Companhia Vale do Rico Doce (CVRD); 2¼ percent/2 percent as the generally acceptable maximums for public sector borrowers without official guarantee, private sector borrowers with development bank guarantee and for commercial and investment banks under Resolution 63: 2½ percent/2¼ percent as generally acceptable maximums for private sector borrowers.

The Central Bank stands ready to borrow the committed funds at either 2⅛ percent over LIBOR or 1⅞ percent over U.S. prime rate. For loans to other borrowers, the spreads agreed must be acceptable to the Central Bank, which indicated the following máximums for spreads over LIBOR/U.S. prime rate to be generally acceptable: public sector borrowers with official guarantee as well as Petrobras and CVRD—2⅛ percent/1⅛ percent; public sector borrowers without official guarantee, private sector borrowers with development bank guarantee, and Resolution 63 loans to commercial and investment banks—2¼ percent/2 percent; private sector borrowers, including multinationals—2½ percent/2½ percent. Brazil is also prepared to pay a 0.5 percent commitment fee on undisbursed commitments, payable quarterly in arrears, and a 1.5 percent flat facility fee on amounts disbursed, payable at the lime of disbursement.

Agreement in principle of restructuring of public and private debt due in 1985–87.

1⅝ percent over “domestic reference rate,” equal to: U.S. dollar certificate of deposit rate adjusted to reserves and insurance: or a comparable yield for loans denominated in other currencies.”

Multiyear debt restructuring agreement.

The repayment schedule is 4 quarterly payments of $1 million starting October 15, 1988 with the remainder to be paid in 25 equal quarterly installments.

In September 1984, Mexico became the first case for which a MYRA was agreed in principle. Maturities of $48.7 billion falling due during 1985–90 (of which $3.2 billion are dollar-denominated debts to foreign branches of Mexican banks) were rescheduled, and the repayment period was lengthened from 8 years to 14 years, ending in 1998. Margins were set at ⅞ percent over L1BOR for 1985–86, 1⅛ percent over LIBOR for 1987–91, and 1¼ percent for 1992–98. Under the arrangements requested by the Mexican authorities, when Mexico is no longer drawing upon Fund resources, the Fund will conduct semiannual consultations under Article IV of the Fund’s Articles of Agreement—a procedure termed enhanced surveillance. These Fund staff reports will be made available by Mexico to creditor banks. Enhanced surveillance will continue through 1990 or 1994 (depending upon the date of final repayment of Mexico’s 1983 new money package).

During the period of the arrangements, creditor banks party to the restructuring agreement can call an event of default if they determine that the implementation of Mexico’s financial program is materially incompatible with the country’s sound and sustained economic growth or incompatible with a viable external payments position consistent with a continuing ability to service external debt. An event of default could also occur if the consultation and reporting procedures were not carried out as described, or if the average level of certain foreign liabilities falls below the level specified in the restructuring agreement.

In addition, three years of the Mexican consolidation period (1985–87) have been “carved out” for a block restructuring; there is specific provision for the possibility that creditor banks may discontinue the restructuring beyond that point if they decide that Mexico’s policies are inadequate.29 In the event that Mexico’s economic situation or prospects deteriorate to the point that it would be unable to meet its financing requirements through normal market channels, it has agreed to seek financing from other sources, which may include a request to use Fund resources.

In the case of Venezuela, the period of final repayment for maturities of $21.2 billion due during 1983–88 was set at 12½ years from the date of agreement in principle (September 1984), and the margin was set at l⅛ percent over LIBOR. The arrangements for monitoring Venezuela’s economy parallel closely those adopted for Mexico. However, Venezuela’s initial adjustment effort was undertaken without a request to use Fund resources. Consequently, enhanced surveillance by the Fund commenced with the first review of Venezuela’s policies during the midyear Article IV consultation in May 1985. It is to extend until the restructured debt is amortized in 1997.

The Venezuelan MYRA restructures a complete block of maturities falling due during 1983–88. Thus, there is no specific provision for a date on which banks may vote to discontinue the restructuring. At any time, however, two thirds of the banks (determined by weight of exposure) may call an event of default if “in their reasonable judgment, the results of Venezuela’s economic program are or will be materially incompatible with a viable external payments position consistent with continuing debt service.” In addition, should operating reserves of the Central Bank fall below $2 billion, an event of default would occur.

For Ecuador, maturities were restructured of $4.3 million due during 1985–89, For maturities not previously restructured, final repayment was set for 1996, with a grace period of three years and an interest rate of I 1⅜ percent over LIBOR or the floating domestic rate. Final repayment for previously restructured maturities was set for 1995, with a grace period of two years and an interest rate of 1⅝ percent over LIBOR. The commercial banks’ arrangements with Ecuador for monitoring its economy are similar to those concluded with Mexico, although Ecuador is required to be under stand-by arrangements through both 1985 and 1986.

Enhanced surveillance of Ecuador would begin in 1987 and run for ten years to the final amortization payment of the restructured debt. After 1986, the restructuring is “serial,” insofar as there is explicit provision for a majority of banks to halt the restructuring in any year, if Ecuador’s financial program is judged inadequate by the banks, or if its external situation or prospects deteriorate. This provision is in addition to the events of default, which could end the restructuring at any time if, based on the comments and conclusions expressed in the annual and mid-year consultation reports, the majority of lenders determine either that the implementation of Ecuador’s economic and financial program is or would be materially incompatible with a viable external payments position consistent with a continuing ability to service external debt, or that there has been a deterioration in Ecuador’s economic position. An event of default could also occur if the consultation and reporting procedures were not implemented in the manner described.

In the case of Yugoslavia, the preliminary agreement with bank creditors covers restructuring of maturities of $3.6 billion falling due in 1985–88, with repayment in equal installments over the seven years 1990–96, which implies a grace period of 3–5 years and a spread of 1⅛ percent. The draft agreement is based in part on an understanding that the Fund would be asked to agree to undertake enhanced Article IV consultations from the expiration of the present stand-by arrangement in May 1986 through 1991. In addition to the monitoring of economic performance under enhanced surveillance, the authorities have agreed to an objective indicator mechanism that would trigger discussions between themselves and their creditors. This is totally separate from the Article IV surveillance. Thus, it is understood that the triggers may go off although policies are on track and, conversely, that policies may be off track although none of the triggers have gone off. The major purpose of the trigger mechanism is to shorten the time lag between implementation of remedial action, if needed, and the diagnosis of such a need, and to facilitate the assessment of the situation by the banks.

For the Dominican Republic, maturities of $707 million falling due during 1985–89 will be restructured. In the agreement in principle signed in May 1985, final repayment was set for 1997. with a grace period of three years and with an interest rate of 1⅜ percent over LIBOR. The arrangements for monitoring the Dominican Republic’s economy included that, initially, the 1985 IMF agreement must be in effect and all drawings that could have been made under this agreement must have been made, and that in subsequent years, an understanding that monitoring arrangements acceptable to banks would be in place. In addition, the agreement stipulates that failure to have arranged a medium- or long-term World Bank export-oriented sector loan or other similar World Bank financial assistance acceptable to banks before 1988 could constitute an event of default.

With Jamaica, an agreement with the commercial bank’s steering committee was reached in September 1985 to restructure amortization payments falling due during 1985–87 and also 1987–89. Amortization payments of $195 million falling due between April 1985 and March 1987 will be restructured with a grace period of 3 years, final repayment after 10 years, and a margin of 1⅞ percent over LIBOR. The restructuring covers all principal payments due during the period of the Fund stand-by arrangement under consideration. Included among the conditions governing the restructuring are that “the IMF stand-by or other such arrangement covering the fiscal year shall have received IMF Board approval” and that “all disbursements scheduled to have been made at such date under the current IMF program shall have been drawn in full.” Jamaica and the commercial banks also agreed to consolidate the maturities of April 1987 to March 1989 into a single loan, thereby setting up an administrative mechanism for a subsequent restructuring.

Arrangements between debtor countries and creditors in the early MYRAs thus provide for several different forms of monitoring by creditors. In general, creditors can halt the restructuring process when they conclude that the implementation of a debtor’s financial and economic program is insufficient. Clauses in the agreement indicate what would happen in the event that the country’s economic situation deteriorates, or in other events of concern to the banks. A key feature of each agreement is the provision governing whether, or to what degree, the restructuring is a “block” or a “serial” restructuring-—that is, how strong a presumption is created that restructuring of maturities falling due in the later years of the consolidation period will depend on satisfactory economic performance and policies.

Monitoring procedures, where enhanced surveillance rather than a Fund-supported program is in place, range from judgmental assessments of the sustainability of the debtor country’s policies to the monitoring of certain variables in relation to agreed trigger values for these variables. In principle, the design of trigger mechanisms and the establishment of monitoring procedures is a matter of agreement between the debtor country and its creditors. The Fund staff will not negotiate, design, or assess trigger mechanisms, so as not to dilute banks’ responsibility in the monitoring process. But the Fund could provide technical assistance to the member country if requested by the member. The function of triggers would be to initiate discussions between creditor banks and the debtor countries. However, triggers should not be seen as simple on/off switches for determining the appropriateness of continued restructuring or new lending. Creditors will need to be full and active participants in the process of monitoring and assessing the policies of debtor countries and the progress achieved in their implementation, and take full responsibility for their lending decisions.

Enhanced Surveillance

The procedure of enhanced surveillance was developed to assist in the process of restoring normal market relations between bank creditors and debtor countries in connection with negotiation of a MYRA. In these circumstances, enhanced surveillance by the Fund was seen as a way for the Fund to help in the normalization of market relations. The key objectives were to improve the country’s capacity to design, implement, and monitor economic policies and to provide information about those policies to creditors; to support banks’ risk evaluation through timely and comprehensive information and through the Fund’s forward-looking assessment of domestic policies; and to foster a shift in responsibility for lending decisions back to commercial banks by avoiding on/off financing indications from the Fund.

Under enhanced surveillance, the annual Article IV consultation report will review and appraise the adequacy of a quantified financial program prepared by the country’s authorities, commenting specifically on the internal consistency of its objectives and targets, and addressing their compatibility with sustained growth and the attainment of a viable external payments position. Interim consultations will address the progress achieved in implementing the financial program and evaluate the country’s economic performance on the same basis as annual consultations. Both annual and mid-year reports will be transmitted to creditor banks by the member country. While the Fund staff will assess the country’s program and review actual developments, the creditor banks will need to weigh that information, together with other available information, before arriving at a judgment about the economic performance of the country and before making their financing decisions.

The terminology and certain techniques of enhanced surveillance are very similar to those of surveillance. Under enhanced surveillance, however, the activities of the Fund extend beyond the normal implementation of its responsibilities under Article IV. Three separate elements together comprise enhanced surveillance: a quantified financial program prepared by the country’s authorities, presenting a comprehensive description of the major macroeconomic objectives and the policies to be followed in their achievement; supplemental Fund staff visits to the country and supplemental Fund staff reports and discussions of these reports by the Fund Executive Board; and the release of Fund staff reports by the member to banks.

Some of these elements represent a further strengthening of improvements already introduced in the implementation of the Fund’s traditional surveillance function. The release of Fund staff reports to private creditors, however, is clearly exceptional. Enhanced surveillance has been conceived as an exceptional and temporary adaptation of Fund procedures and practices, in response to equally exceptional circumstances. Enhanced surveillance is not intended to become a substitute for stand-by and extended arrangements.

Experience gained in early cases of enhanced surveillance has allowed the identification of broad criteria to apply in deciding whether the Fund should accept requests for enhanced surveillance. The first criterion is that the initiative to request enhanced surveillance must rest with the member, which must be convinced that enhanced surveillance procedures are suited to its circumstances. Second, the member must have already achieved a good record of adjustment. A third criterion is that it should support a MYRA that is needed to normalize a member’s market relations and to facilitate a return to spontaneous financing. Fourth, the member must be in a position to present an adequate quantified policy program in the framework of consultations with the Fund staff, which are part of the procedure of enhanced surveillance. With respect to the length of the Fund’s involvement, it would seem appropriate to limit the enhanced surveillance procedure to about the consolidation period of a MYRA or, at most, a little beyond the consolidation period.

New Financing Agreements

In 1984, five member countries that were engaged in debt restructuring and adjustment programs reached agreements with banks on new financing agreements. Three of these were firm concerted lending commitments, totaling $11.1 billion, while two other countries reached agreements in principle on concerted lending commitments totaling $5.1 billion. This compares with concerted lending commitments involving eight countries in 1983 for $13.9 billion. During the first three quarters of 1985, concerted lending commitments of six countries amounted to $2.3 billion. While concerted lending to countries in the Western Hemisphere accounted for more than 90 percent of total new bank commitments to this area during 1983–84, new bank commitments to Asian countries other than the Philippines continued to be on an entirely spontaneous basis.

All concerted bank lending during 1984–85 took place with the encouragement of the Fund and, except for Colombia, was linked to purchases under a Fund program. Nonobservance of performance criteria under a Fund program usually delayed disbursements under new money packages until such time as the country’s drawing rights under the Fund arrangement were restored. Colombia is a special case, insofar as banks tied their financial package to endorsement by the Fund Executive Board of Colombia’s adjustment program. Use of Fund resources was not involved, however.

Banks have expressed interest in greater involvement of the World Bank in new financing arrangements. The increased involvement of the World Bank is viewed as reducing the risk by associating commercial bank lending with sound projects and sector policies. In specific cases, direct financial protection of a portion of bank claims has also been sought through cofinancing operations involving a portion of concerted lending.

The World Bank’s cofinancing program for private banks aims to foster capital flows to developing countries, and to improve the terms of commercial lending, by providing lenders with greater assurance through their association with investments supported by the World Bank. This “B-loan program” was introduced in early 1983. Unlike the earlier cofinancing program, which involved parallel loans to the country, this program enables the World Bank to participate in the cofinancing loans syndicated by the commercial banks in three possible ways. The World Bank can participate directly in, or guarantee, the later maturities of a loan. It can also take a contingent obligation in respect of a fixed repayment installment loan to compensate co-lenders for any rise in a floating market interest rate above an initially scheduled level. Since introduction of the program in 1983, cofinancings through B-loans have involved about $1.6 billion in commercial bank credits, based on about $340 million of World Bank involvement, including the Uruguay operation currently in progress. Most of these operations took place on a spontaneous basis (i.e., outside the framework of concerted arrangements to close the ex ante financing gap of countries engaged in negotiating a debt restructuring). Details of recent World Bank cofinancing arrangements are provided in Table 41.

As regards cofinancing as a part of new money packages, Chile signed an agreement with commercial banks in November 1985 on a new loan of $785 million and a World Bank cofinancing of $300 million, also to be funded by commercial banks. Of the $300 million in cofinancing, up to $150 million will be guaranteed by the World Bank. The World Bank commitment was made contingent upon the commercial banks’ participation in the new money package, while the disbursement of the new loan from the commercial banks is tied to Chile’s purchases from the Fund and drawings under the World Bank’s structural adjustment loan in 1985–86. Uruguay also has requested a World Bank guarantee to cover part of a $45 million syndicated loan from commercial banks which is needed to close Uruguay’s 1986 financing gap. Commercial banks have made conclusion of a MYRA for Uruguay contingent upon the closing of the 1986 financing gap.

In the case of Colombia, the $1 billion financing package, signed in December 1985, does not involve cofinancing. However, the fourth disbursement of the bank package is tied to the World Bank confirming that Colombia will have access to the second tranche of the Trade Policy Loan during 1986. All disbursements require a communication from the Fund to the Colombian authorities indicating that Colombia has complied with its quantitative economic program.

Other Current Developments

In addition to the MYRAs and enhanced surveillance, a number of other developments have occurred in bank debt restructurings and new money packages during 1984–85. The three principal developments were currency redenominations, on-lending, and loan swaps and sales.

Currency Redenomination

Under several recent restructuring agreements with several countries (including Argentina, Mexico, the Philippines, and Venezuela), banks have been permitted, at their option, to redenominate existing loans into their domestic currencies or the ECU. The period for such conversions has varied, extending in one case to four years. Between 50 and 100 percent of the shares of existing loans not denominated in banks’ home currency have been eligible for redenominations, with an additional effective ceiling in the case of Venezuela that limits conversions to about one seventh of the total debt restructured.

Such redenomination may reduce funding risks for non-U.S. dollar-based banks and would reduce the effect of future exchange rate movements on the banks’ claims relative to domestic currency capital, albeit at a U.S. dollar exchange rate which some banks view as unfavorable. For the debtor country, the benefits from currency diversification are difficult to predict, because possible savings on interest payments could be in part offset by the opportunity cost of benefiting from any further depreciation of the U.S. dollar.

Information on the amounts actually redenominated or likely to be redenominated is limited. Banks do not need to elect to redenominate their loans before the restructuring agreement is signed, or for a specified period thereafter. The agreement between Argentina and the banks envisages that almost a quarter of the debt restructured is eligible for redenomination, but there are no indications yet to what extent banks intend to exercise their option. In the case of Mexico, about half of the restructured debt is covered by the currency denomination option; of this portion, a maximum of 50 percent is eligible for redenomination. It is expected that only a modest proportion of Mexico’s total debt will eventually be converted.

In the case of the Philippines, the currency composition of the first tranche of new bank money indicates a continuing strong preference for the U.S. dollar, with a share of 70 percent, but also a considerable interest in yen (18 percent) and ECU (5½ percent) denomination. The Venezuelan authorities have indicated that they expected that many Japanese banks and German banks could eventually elect to redenominate their loans into their home currencies, and that the overall ceiling of $3 billion could be reached.

On-lending and Re-lending

A second development in some recent financial packages has been a preference on the part of banks to extend fresh funds in the form of (or convertible into) trade- or project-related loans to the private sector or to parastatals, instead of purely financial credits to the central government (“on-lending”). Arrangements have also been made to allow some existing debt to be converted into this form (“re-lending”). This enables banks to maintain business relationships in the developing country and to support the export activities of their customers. A number of recent restructurings or new money packages (including those with Argentina, Brazil, Chile, Venezuela, and the Philippines) all include specific provisions for on-lending or re-lending.

In the case of Argentina, for example, the $3.7 billion medium-term loan agreement signed in principle in 1984 foresees that one third of each lender’s disbursement to the Central Bank will be available for on-lending to borrowers from Argentina’s public sector. Specifically, 28 percent will be available for on-lending either to public sector borrowers with a government guarantee or to private sector borrowers without a government guarantee, while a further 5 percent, subject to certain conditions, will be available to private sector borrowers without being guaranteed. Moreover, an additional $0.5 billion of new funds made available to Argentina were in the form of a short-term trade deposit facility.

In the case of Brazil, the 1983 and 1984 restructuring agreements and the interim arrangement for 1985 specify that lenders may re-lend to private and public sector borrowers those amounts falling due during the life of the restructuring agreements; in addition, new money provided under the 1983 and 1984 concerted lending arrangements can be on-lent on similar terms. Chile’s $785 million new money facility signed in 1985 allows re-lending of up to $80 million to the private sector and to certain designated public sector entities, and the 1985 rescheduling provides for the partial on-lending to the private sector of certain rescheduled maturities of the private sector deposited with the Central Bank up to a ceiling of $120 million.

The $925 million credit signed by the Philippines and banks in May 1985 includes a re-lending option which specifies that banks that wish to on-lend have to apply for Central Bank approval which has to take a decision on such applications within 30 days. The Venezuelan MYRA, signed in principle in 1984, contains provisions for a re-lending facility if amortization payments are made over and above the agreed repayment schedule. In such cases, banks have the right to lend to those borrowers and/or sectors that will be designated semiannually by the government or for which individual approval is granted.

Loan Swaps and Sales

Banks in various countries have engaged in swaps or outright sales of loan claims, to even out the distribution of their portfolios, to regroup their claims on countries with which they expect to have continuing business interests, or to reduce their overall exposure. There have been isolated instances of banks undertaking swaps on a large scale. Generally, however, individual swaps and sales are believed to be of very small amounts (substantially less than $5 million).

The U.S. Institute of Certified Public Accountants has provided guidance on the valuation of asset swaps. This guidance indicates that such swaps are to be viewed as the sale of two loans. When such sales are made, the fair market value of the loans must be established, and any toss that arises for each selling bank must be recognized in its income statement. There is a presumption that sales of developing country debt instruments in the context of asset swaps would involve a recognition of loss, although this does not necessarily carry implications for valuation of a bank’s other loan claims on that country. Nonetheless, banks do express concern that swapping assets on any significant scale, or selling sizable claims on developing country borrowers, could at some stage result in regulatory insistence that their holdings of such claims be marked to a lower value. These concerns are strongest among banks which have not earmarked significant reserves against claims on the countries concerned.

A few banks have specialized in arranging loan swaps. These banks apparently find customers mainly among small- and medium-sized banks. In some cases, the “market-making bank” purchases small participations outright, at a discount, and sells them to concerns with an ongoing investment program in the debtor country. According to reports, discounts range from 10 percent to 90 percent, reflecting the economic situation of the debtor country, banks’ existing specific provisions, and—to a lesser degree—the size of the claim.

International Monetary Fund, Recent Developments in External Debt Restructuring, Occasional Paper No. 40 (Washington, October 1985).

Excluding three MYRAs agreed in principle, the amount of bank debt restructured in 1984 would have been somewhat below the 1983 figure.

The rescheduling agreement provides that a majority of banks having more than 55 percent of the original commitments under the 1983 new money package is required to arrest the rescheduling, but that banks having 33 percent of the commitments may trigger a vote on this issue. On the one hand, the provision for a minimum initiating group of votes protects the debtor country from disruptive actions by individual creditor banks. At the same time, the reference to 33 percent of the commitments has been interpreted as an indication that the bank advisory committee (which held approximately one third of the votes) might continue to perform some son of monitoring role.

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