Ivory Coast’s complicated new bond

By Felix Salmon
September 29, 2009
This is big news, in the world of sovereign debt restructuring: Ivory Coast, which defaulted on its Brady bonds in 2000, has come to a deal with the London Club of private creditors to restructure them.


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This is big news, in the world of sovereign debt restructuring: Ivory Coast, which defaulted on its Brady bonds in 2000, has come to a deal with the London Club of private creditors to restructure them.

The most striking thing for me, about the deal, is the fact that Ivory Coast was talking to the London Club at all. The London Club is a group of large commercial banks (Citibank, Barclays, SocGen, you get the picture) who lent billions of dollars to third-world countries in the 1970s and then saw it defaulted on in the 1980s. Eventually, with the help of the US Treasury, those loans were restructured into bonds, which were named after the Treasury secretary at the time, Nick Brady.

Ecuador was the first country to default on its Brady bonds, in 1999. Ivory Coast followed, as did Argentina. But when Ecuador and Argentina restructured their bonds, they didn’t go back to the London Club — they went to the bond market. The London Club is a place to go when a finite number of creditors hold loans; not when thousands of bondholders hold bonds. Or not until now, anyway.

A glance at the terms of the new Ivory Club bond screams “loan restructuring”. Bonds tend to be restructured into something simple: a plain-vanilla global bond, normally, with a set coupon and maturity date. By contrast, the new bond which Ivory Coast is issuing is horribly complex: it starts paying interest immediately, at 2.5%, which then steps up to 3.75% after two years, and to 5.75% another 18 months later. Then, once a six-year grace period os over, the principal of the new bond starts amortizing, according to an almost arbitrarily-complex schedule:

payments 1 to 2: 1%; payment 3: 1.5%; payments 4 to 6: 2%; payments 7 to 12: 2.5%; payments 13 to 22: 3%; payments 23 to 26: 3.5%; payments 27 to 28: 3.75%; and  payments 29 to 34: 4%.

This is the kind of repayment schedule only a commercial banker could love. When I covered the Brady market for a living, people used to joke that nobody really understood the structure of the Brazilian C bond, not that that stopped them from trading it. This isn’t quite that bad, but it still pretty much guarantees that trying to work out yield to maturity and the bond’s reinvestment risk is something you want to outsource to your Bloomberg and is not something you can have an intuitive feel for.

So why do it this way? Why did Ivory Coast negotiate at length with a bunch of bankers, rather than simply mandating Lazard to put a bond swap proposal together, which it could then present to the market? My guess is that the answer lies in the nature of Ivory Coast’s bondholders: it wouldn’t surprise me in the least to learn that the overwhelming majority of them are precisely the same banks which lent the country the original money in the first place. There might have been a Brady deal, but those Bradys didn’t really make it onto the open market: they just remained stuck on a small number of commercial-bank balance sheets. And they’ll probably stay there, too, even after this restructuring. You can turn a loan into bonds, but if those bonds rarely get traded and are held overwhelmingly by banks, it’ll still end up behaving just like a loan.

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