IMF approval reviews are always subject to delays. A country must often meet several conditions before it gets the green light. For Ghana, this included bilateral creditors signing a MoU (memorandum of understanding) on its restructuring terms. The government said the MoUs have been signed, which should allow safe passage of the IMF’s second review.
Having a seat at the table
A major takeaway from the three restructurings is the importance of having a seat at the negotiating table. First-hand engagement allows investors to develop a more informed investment view, as opposed to relying on what is frequently misleading market speculation.
We’ve seen this in Ghana. We’re one of the eight investors on the Steering Committee (SC). This is a smaller group of creditors representing a larger group of bondholders, or the ad-hoc creditor committee (AHC), in discussions with financial, legal advisors and the issuer.
The SC is not necessarily the largest group of creditors but, along with the legal and financial advisors, it plays a critical role in driving the restructuring process. SC members usually attend most, if not all, meetings with the advisors, and then with the issuer and advisors when the time comes. AHC meetings are more infrequent, and members often ask the SC and advisors for informal updates. For the record, the advisor information we’ve received, which we’ve shared internally and with other creditors, is public. As the deal approaches, however, the SC will have to sign an NDA (non-disclosure agreement) before exchanging views with the issuer and advisors on the proposed restructuring terms.
These meetings are often challenging, with discussions around the minutiae of restructuring. This includes whether any deal meets the IMF’s DSA parameters. This can be tricky. The initial Ghana and Zambia DSA’s were contentious. Creditors thought the IMF’s macroeconomic assumptions were too bearish, implying a weaker recovery in the bond valuations than creditors expected.
All key stakeholders – the country in default, IMF, Paris Club (which represents most bilateral creditors), China and creditors – must find ways to accelerate the restructuring process. We hope the lessons learned over the past three years will make that a reality.
Sri Lanka
Sri Lanka defaulted two years ago. We haven’t been involved in any of the creditor committees. However, the updates we’ve received suggest both sides have largely accepted the terms of the restructured bonds. This will also include a contingent instrument in the form of a macro-linked bond (MLB), which has been the main source of the delay in the restructuring.
The IMF is assessing whether the MLB complies with the DSA parameters and has yet to sign-off on the deal. One SC member has described the MLB as “complex”. This could explain why the IMF has yet to comment on the revised MLB.
Critics often oppose adding contingent instruments to debt restructurings. However, we think these are a ‘win-win’ solution. They improve the country’s capacity to service debt when it meets the payout trigger and reduce the losses that most investors suffered as a result of the default. The instruments can also expedite a restructuring agreement, enhancing capital flows into the country.
As with Ghana, Sri Lanka is allegedly close to a deal with its Eurobond creditors. One potential fly in the ointment is October’s presidential elections. In the interim, all eyes will be on the IMF
Mainstream EM
Investors are also preparing for debt restructuring talks with Ukraine, with Lebanon and Venezuela waiting in the wings. The challenges for these mainstream EM countries are unique. Ukraine is in the middle of the war, which is arguably the worst time to restructure. Lebanon must resolve its political impasse and select a new president before it can secure a deal. This is unlikely until the Gaza conflict ends. The US, meanwhile, must confirm the legitimacy of Venezuela’s July presidential election before any meaningful talks can start.
Eurobond creditors, having learned hard lessons from the flawed 2020 Argentina debt restructuring, are now expected to insist on a cash coupon arrangement with Ukraine. Moreover, the G7 will have to endorse any agreement, given its taxpayers have footed the bill for Ukraine over the last two years. Despite these headwinds, a restructuring agreement in 2024 remains possible. However, the clock is ticking, with the two-year debt moratorium it reached with creditors. expiring in August.
Meaningful discussions with Lebanon and Venezuela are unlikely until 2025 at the earliest. Nonetheless, market speculation and low bond prices (Lebanon trades around seven cents, and the Venezuela complex is in the low-to-high teens) could prompt some distressed investors to take a punt before negotiations commence.
Final thoughts…
We hope the lessons learned from lengthy debt restructurings will inform the next wave of defaults. But private-sector creditors can only do so much to improve the process. Much will depend on the IMF, Paris Club, China, and the bond issuers. Unfortunately, these defaulted countries have suffered collateral damage because of the flawed Common Framework, the debt restructuring process that the G20 created in late-2020.
Recently, policymakers in New York introduced new legislation that has yet to be formally approved but could change international bond contracts. This legislation may restrict investors' capacity to negotiate fair and equitable restructurings. A new UK government is likely to introduce something similar. Most international bonds are issued under New York and UK law, so the new rules could have a chilling effect on investors and issuers. These unintended consequences could potentially increase the borrowing costs for nations most in need of private financing. This will present new challenges for issuers and investors involved in the next wave of defaults and restructurings.
Important Information
Foreign securities are subject to different accounting and regulatory standards, and political and economic risks. These risks are enhanced in emerging markets countries.
Fixed income securities are subject to certain risks including, but not limited to: interest rate (changes in interest rates may cause a decline in the market value of an investment), credit (changes in the financial condition of the issuer, borrower, counterparty, or underlying collateral), prepayment (debt issuers may repay or refinance their loans or obligations earlier than anticipated), call (some bonds allow the issuer to call a bond for redemption before it matures), and extension (principal repayments may not occur as quickly as anticipated, causing the expected maturity of a security to increase).
AA-250624-179929-1