Felix Salmon

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.

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.

3 comments so far | RSS Comments RSS

I’m not sure I understand your point. Because the exit bond is not a bullet structure it is a loan or is it because the London Club led negotiations it is held by banks is a loan? Does it matter?
Second for someone who “covered the Brady market for a living” you should know that the majority of exit bonds in restructurings have some sort of principal grace period and step up coupon structure. Indeed. look at the Russia 30 (step-up coupon and amortizing bond), Ecuador ’30 (step-up, amortizing or principal buyback with claim on debt varying over the life of the bond, to the Argentina Discounts and Pars. (Step-coupon amortizers, and oh yes discount capitalize). The idea is not to make it “complicated” on the behalf of bankers but to provide cash flow relief for sovereign borrower.

I think you will find that most of the loans that turned into Brady bonds found their way into a broader market the original bank lenders. This will be likely be the case with the Ivory Coast as investors who are benchmarked to an emerging market bond index will need to buy these assets to match the benchmark.

Far more interesting would be to look at what the implications are now that more countries are now curing default. Indeed even contentious Argentina is considering a deal with the 2005 holdouts. Why are Ivory Coast and Argentina both likely to reach a deal after (9+ years for Ivory Coast and 4+ years for Argentina)? Could it be that access to global capital markets is more important in the new world order? Has the cost of defaulting on sovereign obligations changed?

Posted by Joe the Trader | Report as abusive

I wouldn’t be surprised if the bonds are still on London Club books because nobody was interested in buying them.
IIRC, Côte d’Ivoire was once an economic success story by sub-Saharan African standards, to the point where they had to adopt a restrictive immigration policy. Eventually, though, Cd’I reproduced the typical sub-SA pattern of awful governance and endemic violence, with the concomitant loss of whatever gains they had once made.

Posted by Mike | Report as abusive

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

… ecuador and argentina are out, they are barred from international financial market.

Posted by nounou | Report as abusive

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