Felix Salmon

Ivory Coast’s bond exchange gets it exactly right

By Felix Salmon
April 12, 2010

It’s sheerest coincidence that the UK’s new anti-vulture-funds law came into force just as the Ivory Coast was concluding its astonishingly successful debt swap. The Republic took all of its six defaulted Brady bonds, and swapped them for one brand-new $2.3 billion global bond due in 2032. And it got well over 99% of bondholders to tender their bonds into the exchange: this has to count as one of the most successful sovereign distressed-debt exchanges ever.

Part of the reason it was a success is that the haircut is quite low, at just 20% of the principal amount outstanding: if you tendered a defaulted bond with a face value of $1,000, you got in return a performing bond with a face value of $800. That’s quite a good deal, even if the coupon on the new bonds is quite low in the early years: it starts at 2.5%, and steps up to 5.75% in 2013.

Another reason is the relatively small number of creditors: although these were technically bonds which could be owned by anyone, in practice the bondholders were just a few dozen banks and hedge funds who could be invited around a table into London Club negotiations.

But also the hedge funds involved knew full well that a holdout strategy was very unlikely to work, especially once take-up of the offer reached a critical mass. As part of the bond exchange, the holders of the old bonds voted to strip away their waiver of sovereign immunity, meaning that it would be essentially impossible to take Ivory Coast to court in an attempt to collect on the defaulted debt.

One interesting aspect of the Ivorian exchange is that it took place exactly along the lines of the new UK law: essentially the London Club was bailed in to what the Paris Club had already agreed. Does that prove the law’s not needed, or does it show how powerful the law was even before it was passed? My feeling is that the truth is somewhere in the middle, and that although Ivory Coast didn’t really need this law, it might come in handy for other HIPC countries.

There’s been much less wailing and gnashing of teeth from the buy side than I would have expected when it comes to this law, so it seems to me that investors turn out to have been one short step ahead of it. They’re already happy to enter into deals like the Ivorian exchange, and they’re reasonably confident that now the law has been passed, it’s not going to get expanded to include future indebtedness or non-HIPC countries. But at the same time, the law will probably help to clear up a few outstanding cases like the ongoing one against Liberia. I still don’t think it was particularly necessary, and I dislike governments messing around with contracts ex post, but it might conceivably do some good at the margin.

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If the point is retiring as much debt as possible at the lowest price, it was successful. If it is intended to encourage further investment in Ivory Coast, it is debatable as this hair cut was after the original 80% haircut. It is more a sign of the pavlovian response to any liquidity and the big institutions dominating this paper. The reality is that Ivory Coast only got HIPC terms because of French pressure within the World Bank to expand the ratios to encompass their sphere of influence in West Africa…

And as to attracting further investment, Ivory Coast’s French advisers have insisted (with IMF support) that they should default on recently placed local currency bonds and notes on the basis that if the holder is foreign it constitutes external debt and they must default… Something that makes one wonder if Paris Club conversion clauses continue to have validity…

The fact that all the holders of the CFA paper were London based is well known…

Now that is far sighted, isn’t it?

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