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Emerging debt restructuring finds favour

Source: Reuters - Fri 6th Nov 2009

A global economic recovery and extensive support for emerging markets from multilateral lenders have driven up distressed debt prices, making the market more attractive for emerging sovereign borrowers to restructure debt.

The recovery has fed into a stronger performance across the board for emerging markets, while tight monetary conditions worldwide have once more pushed investors towards higher yield.

This is benefiting countries such as Argentina which are looking to restructure defaulted debt and issue new debt.

"The combination of market sentiment having improved and global interest rates being low are such that it is a very good time to restructure" said Richard Segal, analyst at Knight Libertas.

Distressed debt often refers to debt on which the borrower has already defaulted. It is traded on the expectation that a restructuring deal will be reached.

Argentina and Ivory Coast have signalled restructuring deals of defaulted debt this year, and the normally thinly traded debt has risen sharply in expectation of the deals.

Argentina's bonds are trading at around 38 cents on the dollar, compared with 8 cents a few months ago.

Ivory Coast debt is trading at around 50 cents, compared with 25 cents in May and 17 in February. 

In addition, high-risk sovereigns from Iraq to Ukraine are also considered distressed debt, typically defined as having yield spreads of at least 1,000 basis points over U.S. Treasuries.

"Emerging markets and restructured or low-rated credits have all performed quite strongly, on the back of stabilisation of the global economy" said Stuart Culverhouse, chief economist at frontier markets brokerage Exotix.

"Strong implicit and explicit support from the IMF has lifted the whole asset class."

G20 leaders agreed a $1.1 trillion (670 billion pound) boost for the International Monetary Fund at their London summit in April. This included the injection of $250 billion in special drawing rights, the IMF's internal unit of account, to all members' foreign exchange reserves.


JPMorgan's EMBI+ index of more liquid emerging sovereign bonds yields around 320 basis points over U.S. Treasuries, compared with 900 bps in Oct 2008, at the height of the crisis.

Narrower yield spreads are encouraging emerging sovereigns to restructure or issue debt as they will have lower debt servicing costs.

BoA Merrill Lynch is overweight Argentina and Ivory Coast in its sovereign hard currency debt portfolio, indicating it expects prices of these countries' bonds to rise further.

Poor domestic economic conditions have also encouraged countries like Argentina to seek to restructure their debt. 

Argentina is looking to restructure $20 billion of outstanding debt plus accrued interest payments, and issue a new $1 billion bond.

"When times are good, governments do not need to borrow," said a London-based fund manager who holds Argentinian debt.

"When times are tough, they need to access the markets. That's the case with Argentina."

Economy minister Amado Boudou has said investors will have to take losses of at least 65 percent to enter a new debt swap, and he would be happy with a 60 percent acceptance rate.

However, prices of the defaulted bonds have held up even in shakier markets of the past week.


The Ivory Coast said earlier this year it would restructure some 2.2 billion euros of defaulted debt.

Investors only get 80 percent of the debt they exchange for the new 23-year bond but coupon payments rise quickly over the life of the bond, from 2.75 to 5.75 percent.

"They came out with much better terms than expected, the debt is performing well on the back of that" said Marc Balston, emerging debt strategist at Deutsche. 

Ivory Coast defaulted debt could still rise a little further, analysts say.

Another possible contender for restructuring is the Seychelles, which defaulted on the interest payments on a $230 million Eurobond last year.

Talks are ongoing to restructure the bond, analysts say.

Ecuador had a successful buyback of defaulted bonds earlier this year, and prices have leapt for the 2015 bond on which it did not default, close to par levels.

Elsewhere, state-owned borrowers are also working through restructuring plans which have come about more recently, largely as a result of the global economic crisis.

Troubled Ukrainian state energy firm Naftogaz defaulted on a $500 million Eurobond in September, and is restructuring that with outstanding bank debt to create a new $1.65 billion bond.


Kazakh banks BTA and Alliance were forced to seek the shelter of government support and are looking to restructure debt on which they defaulted earlier this year.

Debt-laden Dubai is restructuring some $80 billion debt held by the government and state-linked entities. 

However, successful restructuring is not a foregone conclusion.

Investors remain concerned about the prospects for the Kazakh restructuring process and are also awaiting the repayment of some Islamic bonds in the Gulf.

And among the frontier sovereigns, there is no movement on the defaulted debt of North Korea, and little on Cuba, even after Raul Castro replaced brother Fidel as president last year.

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