With interest rates so low and optimism for emerging markets so strong, investors are willing to take greater risks to achieve higher yields. So theoretically it’s a good time for Côte d’Ivoire to unveil a plan to reschedule its debt via a Brady plan, only the second in Africa after Nigeria’s. However, bullishness about emerging markets could be an obstacle to the Ivorian Brady plan, which is due to be implemented by the second quarter of 1997.
The Brady plan envisages a debt buy-back of a minimum of 30% of the principal at a rate of 24 cents in the dollar and cancellation of corresponding past-due interest. The remaining eligible interest will be exchanged for past-due interest bonds with a 20-year maturity. The 70% remaining principal owed will be paid off with a choice of a 30-year discount bond or a 20-year front-loaded interest reduction bond (flirb) at the discretion of the creditor.
Traders seem to be flocking to buy the riskier flirbs. Both the donor group and the Ivorian government are concerned that sufficient debt reduction will not be achieved if this is the case.
At the time that the Brady plan was being worked out by the Ivorian government and the steering committee (representing the biggest creditors BNP, Société Générale, Crédit Lyonnais, Citibank and Chase), nobody foresaw that emerging markets would be so bullish.
The Ivorian government and its main backers (the IMF, the World Bank and the French treasury), had hoped that creditors would plump for an even distribution between the flirb and the discount bond, thereby reducing problems associated with a higher initial payout for discount bonds (to obtain the collateral) or larger repayments in the future for flirbs.
“The majority of investors will prefer flirbs because their net present value basis is much better than on the discount bond,” says Bradley Wickens, a trader at Banque Indosuez. “If your perception of the risk associated with the Ivorian debt is lower than the market’s perception, again you’re going to go for the flirbs.” This is because whereas the discount bonds are collateralized with US or French treasury bonds, the interest payments on the flirbs are only collateralized on a rolling interest rate guarantee for six months, until the end of the 13th year.
The flirb is definitely the most lucrative option for the banks as the principal is kept at par. Unfortunately, when the repayments fall due between 2006 and 2016, this could increase the Ivorian debt repayments by anything up to an additional $130 million over this time period.
“At the 35% discount 35% flirb level, total debt reduction would be 77%. With 100% flirbs, total debt reduction decreases to 73%” which is not an acceptable level for the donors, explained John McIntyre, the World Bank economist for Côte d’Ivoire. He was unable to comment on whether 77% was as low as the World Bank was prepared to go.
Other sources close to the IMF have intimated that if the overall deal is seen as being detrimental to the future of the Côte d’Ivoire the steering committee will be asked to rethink their strategy before the deal goes ahead.
The onus is falling on the steering committee to stick to the terms of the Brady Plan agreed, while the smaller banks are apparently doing what they want. This could lead to the absurd situation of the major creditors having to buy more than 35% discount bonds in order to balance out the smaller banks buying only flirbs. Steering committee members were unavailable for comment on this.
Dealers’ response to this view have been mixed. Jerome Booth, emerging markets economist at ANZ, believes that “it is really too late for the IMF to start complaining about the design of the Ivorian Brady plan if they don’t like it. It would be very foolish for the fund to backtrack at this stage and would not help anyone involved.”
Another trader at a London investment bank is a bit more cautious. He thinks that the IMF is in a position to put pressure on dealers to buy the discount bond and that if this is the case, the bankers will be significantly less happy with the terms of the Brady plan than they were at the outset. However, it is in the creditors’ interests that the deal should be a success. Côte d’Ivoire has sat on interest payments for a decade and without a deal could continue to do so for a further decade.
Additionally, without the backing of the IMF, the Ivorian government will be unable to go ahead with it’s buy-back or initial purchase of bonds. The Ivorians are providing between $40 million and $60 million of their own revenues, with the balance being spread between the IMF, World Bank and bilateral lenders. With an even mix, up-front costs are $287 million. This rises to $332 million if only discount bonds are chosen and decreases to $238 million if nothing but flirbs are bought.
Unusually for a Brady plan, the 30% cash buy-back is a mandatory minimum, whereas previously the amount of buy-back has been voluntary. The buy-back will be accomplished in two stages.
In the first, all creditors will offer a proportion of the debt they hold to be bought back. If the aggregate total proportion of debt offered by the creditors is equal to or not greater than 30% of the total, the second stage will be for the steering committee to pressure each creditor (all 180 of them) to modify the proportion of debt offered until the minimum critical mass of 30% is reached.
The agreement concerning the restructuring of its $7.2 billion external bank debt was reached on November 22 1996.
Alex Mitcheson-Smith, an executive director at UBS, was surprised at how quickly the talks were wrapped up, as “six months ago the banks and the Ivory Coast seemed to be in a deadlock and talks for debt rescheduling plans were going nowhere. However, recently, the banks have caved in on all the Ivory Coast’s demands”.
The creditors’ decision on what mix of flirbs and discount bonds they want must be announced by March 12. If the level of debt reduction is considered sufficient, the plan will fly. If it isn’t, the success of the Ivorian Brady plan will become even more a matter of speculation. Katrin Fhima
