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The authors would like to thank Myrvin Anthony, Robert Cocker, Tomislav Galac, Herve Joly, Yan Liu, and Perry Perone for helpful comments and suggestions. The usual disclaimer applies.
For example, Azerbaijan, Cameroon, Kenya, Mongolia and Uganda.
Sub-Saharan countries had several financing options available, including non-traditional creditors with concessional (sometimes with not full concessional) finance, project financing, securitized financing of some infrastructure, Public Private Partnerships, and sovereign issues.
Correlation between debt markets in the more advanced EM countries and mature economies has substantially increased over the last years. Debut issuers and ‘frontier’ markets are relatively disconnected from other markets, offering a chance for higher diversification in investors’ portfolios.
CACs in bond contracts consist of the majority enforcement provisions and the majority restructuring provision. The majority enforcement provisions (including acceleration and de-acceleration clauses) are designed to limit the ability of a minority of bondholders to disrupt the restructuring process by enforcing their claims after a default but before a restructuring agreement, while the majority restructuring provision allows a qualified majority of bondholders of an issuance to bind all holders of that issuance to the financial terms of a restructuring, either before or after a default.
Until now, some EM sovereign issuers cannot issue long-term domestic bonds (e.g., beyond 10 years maturity), and/or pay a high premium on their domestic debt (even correcting for expected exchange rate appreciation.)
This is mostly due to the fact that external bonds are issued under foreign law (for instance, the New York, English, or Luxembourg law that applies to any matters related to the bond). This ensures that the issuing government cannot, for example, without legal consequences, forcibly restructure the bond or declare it illegal, or change the bond contract without the consent of the investors.
In addition to the existence of a sovereign benchmark, other factors may also be important, such as legal and tax frameworks, market conditions (e.g., international demand for corporate debt), or domestic liquidity. Further, the opposite may also hold true, i.e., sovereign international bond issuance may follow international private sector (e.g., corporate) bond issuance.
In the DSF, there are indicative thresholds for various debt ratios, which are used in the Debt Sustainability Analysis of LICs. However, there are no debt thresholds for assessing the sustainability of Middle Income Countries. Further, several academic studies consider the public external debt sustainable if the ratio of total general government external debt to GDP is below a certain level. For example, for EM and developing countries, some studies set this threshold at 50 percent for countries without debt crises and at 15 percent to 30 percent for countries where debt crises emerge frequently (Reinhart, Rogoff, and Savastano, 2003), while other studies maintain a limit of 40 percent (Manasse, Roubini, and Schimmelpfenning, 2003).
Because indices are usually tracked by institutional investors, participation in the index guarantees interest and long-term holdings by this group of investors. Further, investors who do not track the index may become interested in a debut issue if they know that the bond will be held by a stable group of investors.
This presupposes that reopening(s) of a bond issue will not be frequent enough to cause similar rollover risks.
This is referred to as “negative carry”. However, some EMs or LICS may prefer to pay a negative carry if it is outweighed by potential higher funding costs in the future. In this case, the negative carry is viewed as an up-front insurance premium that the issuer is willing to pay against future higher borrowing costs or the risk of not being able to easily access external markets.
However, the recent debut issue of a 10-year bond by Ghana has shown that investors can be interested in even longer maturities, especially when the supply of external sovereign debt is relatively low.
Countries can also issue bullet bonds and simultaneously commit to set aside resources annually in a sinking fund to meet the principal repayment. This structure is analytically equivalent to an amortizing bond.
Under a trust structure, the right of individual bondholders to initiate litigation is effectively delegated to the trustee, who is required to act only if, among other things, it is requested to do so by bondholders holding a requisite percentage of outstanding principal. Significantly, the terms of the trust deed will also ensure that the proceeds of any litigation are distributed by the trustee on a pro rata basis among all bondholders. By contrast, under a fiscal agency structure, individual bondholders have the right to initiate legal proceedings against the issuer following a default and can keep any recoveries from such proceedings.
For example, if the lead manager maintains post-issue support by providing market-making services or enhancing liquidity, it could be easier for the issuer to engage in debt buybacks or swaps at a later date.
Figure 4 indicates that, despite the fact that spreads correspond to different issuance periods, bond spreads at issue tend to increase with the deterioration of the issuer’s credit rating. This is consistent with the relevant literature, which finds that credit ratings – used as proxies for macroeconomic fundamentals and credit quality – are significant and strong determinants of spreads (IMF 2004a and 2004b).
In Figure 5, the upward-sloping line shows a relatively strong positive relationship between the bond spread at issue and the EMBI Global spread on the issue day. Further, the circled data points in the upper left side represent recent entrants to the international financial markets with possibly inadequate preparation, while those in the lower right side represent countries with appropriate preparation and/or high credit rating.
Lack of specific knowledge on the creditors’ side on the use of funds often leads to some “adverse selection” premium charged to an issuer.
In some cases, corporate issuers had successfully accessed the markets ahead of the sovereign (e.g., Brazil). Further, in other countries, the issuance of a benchmark bond was not followed by higher corporate issuance.