Appendix II. Outcomes of Recent Restructurings
- Harald Finger, and Mauro Mecagni
- Published Date:
- April 2007
In September and October 1998, Ukraine restructured treasury bills equivalent to approximately $300 million and held by nonresidents into a two-year zero-coupon Eurobond with an annual yield of 20 percent. It renegotiated its debt to clients of a commercial bank ($109 million) in October 1998. The deal involved up-front cash payments of 25 percent and converted the balance into a two-year loan carrying an interest rate of 16.75 percent and involving graduated principal payments. This was followed in August 1999 by the renegotiation of $405 million in debt held by two banks. The deal involved a negotiated rollover into other instruments, including the augmentation of existing DM Eurobonds. In February 2000, after this piecemeal approach had proven insufficient, Ukraine launched a more comprehensive restructuring involving Eurobonds and Gazprom bonds with a face value of $3.3 billion (including the recognition of past due interest) and coupons ranging from 8.5 percent to 16.75 percent. Investors were given the choice of converting their claims into either a euro-denominated Eurobond with a 10 percent coupon or a U.S. dollar–denominated Eurobond with an 11 percent coupon. Both bonds carried seven-year maturities and one-year grace periods. The operation was sweetened by an up-front cash payment (see Table 6). None of Ukraine’s debt treatments involved a reduction of principal.
Pakistan restructured $929 million of commercial loans in 1998/99, of which $777 million involved the rolling over of trade finance facilities on an annual basis for three years. In November 1999, Pakistan exchanged its outstanding Eurobond obligations ($608 million) into a U.S. dollar–denominated six-year Eurobond with three years’ grace and a 10 percent coupon. The restructuring involved a nominal increase in principal outstanding.
Argentina’s June 2001 megaswap attracted about $30 billion in outstanding government bonds. Although the exchange reduced near-term government debt service, it steeply increased principal obligations in the longer term and involved a small increase in principal outstanding. Subsequently, the government announced a two-stage approach to a more comprehensive debt restructuring. During Phase I in December 2001, approximately $41 billion in sovereign debt and $9 billion in provincial debt were exchanged for new government-guaranteed loans featuring a reduction of interest rates to 70 percent of the contractual level (up to a maximum of 7 percent), a 17-month grace period for interest payments, and a three-year extension of maturities for original claims maturing before 2010. The exchange involved no reduction in principal. Argentina defaulted in late December 2001, before Phase II could be addressed.
In January and February 2005, after three years in default, Argentina launched a global debt exchange offer to restructure defaulted bonds to private creditors residing both inside and outside Argentina. Eligible for exchange were 152 different securities amounting to a total of $81.8 billion, including $2.1 billion past due interest accrued through end-2001. Past due interest accrued since 2002 (around $20 billion) was not recognized. Eleven new securities were offered in exchange, each with a detachable GDP warrant. The new securities include par bonds, which are not subject to a haircut on nominal principal, quasi par bonds with a principal haircut of 30 percent, and discount bonds with a principal reduction of 66 percent. The new bonds differ in their repayment structures (grace periods between 21 years and 33 years, maturity between 30 years and 42 years), coupon structures (step-up structures on the par and discount bonds, fixed rate of 5.57 percent on the quasi par bonds), interest capitalization provisions, and cash sweeteners, which were designed to yield approximately equal net-present-value reductions.
Moldova employed a piecemeal debt-restructuring strategy. In March 2000, agreements were reached with a commercial bank to cancel government-guaranteed debt, and with a U.S. company to reschedule $22.6 million in government guarantees over six years. In May 2000, a government guarantee ($1.9 million) to an Italian company was restructured with a nine-year amortization schedule, and, in August 2000, government guarantees worth $4.6 million to a German company were restructured over 15 years, with a five-year grace period. Arrears to Gazprom were cleared through the issuance of promissory notes and agreement on a debt-equity swap that took place in early 2001. Moldova’s Eurobond exchange was the smallest of those considered in this paper, covering $39.7 million in outstanding principal of a single Eurobond. The restructuring was unique given that 78 percent of the outstanding principal was held by a single asset-management company. Restructuring negotiations started in June 2002, an agreement in principle was reached in August 2002, and the agreement became effective in October 2002. Under the agreement, there was a $2.55 million principal reduction and an up-front cash payment of $3.97 million. The remaining obligation was restructured into a 6½-year amortizing U.S. dollar–denominated bond with back-loaded principal payments. The bond paid U.S. dollar six-month LIBOR plus 426.5 bps. In September 2003, a rescheduling agreement was reached with a commercial bank regarding a called guarantee of EUR 2.3 million. Principal payments were stretched over three years, and there was an NPV reduction of 3 percent (using a 10 percent discount rate). In April 2004, an agreement was reached with Gazprom for cash settlement of defaulted promissory notes. The notes with a face value of $111 million were settled for a cash payment of $47 million, implying an NPV reduction of 58 percent (discounted at 10 percent). In June 2004, Moldova settled refinanced lease payments ($11.1 million) that were in default with a U.S. company. The cash settlement implied an NPV reduction of 55 percent (discounted at 10 percent).
Uruguay’s bond exchange in April and May 2003 involved $5 billion in outstanding debt. Investors were given two options. They could exchange each existing bond either for a new obligation carrying a similar coupon and a longer maturity (five years, generally, blended in some cases with a 30-year bond) or for longer-dated bonds that would serve as benchmark bonds and that would therefore be more liquid than the bonds offered under the first option. In some cases, the second type of bonds would also be blended with 30-year bonds. The exchange resulted in a reduction of principal of $49 million, equivalent to 1 percent of the exchanged bonds.
In April/May 2005, the Dominican Republic exchanged $1.4 billion in two outstanding bonds for two new amortizing bonds with longer maturities (2007–11 and 2013–18). The exchange did not involve a reduction in principal and reduced the net present value of claims only slightly (1 percent), as the country’s needs were seen largely as liquidity-related. In October 2005, the Dominican Republic concluded an agreement with its London Club creditors to reschedule $125 million in principal falling due in 2005–06. The agreement featured a maturity of five years and a grace period of three years, and the average interest rate was reduced by 2 percentage points. In the same month, an agreement was finalized with a Dutch bank to restructure $50 million on similar terms.
In Ecuador, domestic debt (earning about 10.4 percent interest before the restructuring) was rolled over without a reduction of principal into seven-year bonds with a grace period of two years, and paying LIBOR plus 2 percent interest. The defaulted external bonds were swapped into a single global U.S. dollar–denominated 30-year step-up bond carrying an initial 4 percent interest rate that would increase by 1 percentage point per year to a maximum of 10 percent. This operation involved a principal reduction of between 0 percent and 60 percent on different types of bonds. Bondholders were given the option of converting the U.S. dollar 30-year bond into a 12-year U.S. dollar–denominated bond with a 12 percent interest rate, contingent on their accepting a further principal reduction of 35 percent. All in all, Ecuador received a principal reduction of nearly 40 percent on its defaulted external bonds. The deal also involved the cash payment of overdue interest obligations on the Brady bonds.
In Russia, the restructuring of domestic ruble debt (10.8 percent of GDP) in May 1999 involved the discounting of outstanding claims using a 50 percent discount rate. The resulting claim was exchanged for a menu of new assets: 10 percent in cash and three- and six-month treasury bills; 70 percent for four- and five-year bonds with coupons yielding 30 percent annually in the first year and declining steadily to 10 percent in the last year; and 20 percent for government paper that could be used to settle tax arrears or invest in Russian enterprises. Investors were allowed to exchange their MinFin-3 bonds for a combination of new foreign-currency-denominated eight-year bonds and four-year ruble-denominated bonds at an interest rate of 15 percent in the first year and 10 percent thereafter. The Soviet-era debt owed to the London Club ($29 billion in PRINs and IANs) was exchanged for $21.2 billion in new 30-year Eurobonds with a grace period of seven years and an initial interest rate of 2.3 percent to increase over time to 7.6 percent. Simultaneously, past due interest on PRINs and IANs was capitalized into a 10-year Eurobond with six years’ grace and coupons of 8.25 percent. The operation was sweetened by an up-front cash element (see Table 6). Overall, the Russian restructuring operations involved a principal reduction of approximately 4.1 percent of GDP.