Debt relief for poor nations not an easy sell to bondholders

Debtor countries would have to convince investors to use collective-action clauses to change the date of payments on each bond series

ABUJA • A pause in debt payments for the world’s poorest countries to help them battle the coronavirus will be a hard sell for private creditors.

The Group of 20 leading economies last week heeded calls from African finance ministers to grant a debt waiver of about US$20 billion (RM87 billion) until the end of the year, and asked private creditors to step up.

Groups representing commercial creditors, who snapped up bonds from low-income countries in recent years amid record-low yields in developed markets, said they would be willing to participate. But a deferral of sovereign bond payments will be far from easy.

Debtor countries would have to convince a majority of investors, from hedge and pension funds to sovereign wealth funds, to use collective-action clauses to change the date of payments on each bond series.

“To get this majority saying Yes, you have to offer a sweetener or have very friendly bondholders,” said Lutz Roehmeyer, the CIO of Capitulum, which manages €1 billion (RM4.7 billion) in assets. It’s “very unlikely that this will succeed,” he said.

The Institute of International Finance Inc estimates that the world’s poorest nations — most of whom are in Africa — have some US$140 billion in general government debt-service obligations due through the end of the year, including US$10 billion in foreign currency. That calculation includes all kinds of debt: To private and public creditors, domestic and foreign, short term and long term.

Even before the pandemic halved public revenues and forced governments to close borders in Africa, many countries on the continent were already struggling with high debt levels after issuing close to US$60 billion in Eurobonds in the past two years. Some of Africa’s biggest oil producers, including Nigeria and Angola, will be hard hit by the tumbling price of crude. Even if Brent steadies at US$30 a barrel, that’s about 46% below the level the countries used to model their budgets, according to the World Bank.

Depending on the contract, even a deal with the majority of bondholders runs the risk of being challenged in courts by minority creditors, as happened in the case of Argentina, said Mark Mobius, founding partner of Mobius Capital Partners LLP.

In 2016, Argentina ended 15 years of litigation by paying US$9.3 billion to “holdout” creditors.

A revision of payment terms, even in agreement with investors, will be considered a debt default, leading to negative credit and rating implications for both creditors and issuers, according to Moody’s Investors Service Ltd.

Still, giving countries some financial room to recover from the pandemic and resume payments in the future is a much better deal for investors than outright default, said Hans Humes, the president and CIO of Greylock Capital Management LLC.

“Why sue for a 100% and take ten years to collect and put yourself out there as being the jerk internationally in the middle of a health crisis,” said Humes, who has participated in dozens of sovereign debt restructurings. He said countries could offer bondholders options on future commodity revenues to accelerate standstill agreements.

The last time private creditors were asked to join a debt-relief initiative in the late 1990s it resulted in protracted negotiations with drawn-out litigation by disgruntled investors. An International Monetary Fund-backed Sovereign Debt Restructuring Mechanism had little traction with creditors and failed to take off in the early 2000s. — Bloomberg