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Rinegoziazione del debito per la Giamaica.
Jamaica announces debt swap to push-start the economy
By Joe Kogan, Scotia Capital
January 13, 2010
In a televised address to the nation this evening, Jamaican Prime Minister Bruce
Golding revealed to the nation his administration's proposal for reducing the
country's domestic debt burden. In a debt exchange to be launched tomorrow,
holders of J$700bn of local debt with interest rates up to 28% will be asked to
swap such debt for new bonds with lower interest rates and longer maturities.
Such a swap will save Jamaica J$40bn in debt service per year. More
importantly, it will open up the way for $1.3bn in IMF funding and $1.1 bn in
multilateral development bank funding over the next 27 months, with half of that
amount to be distributed over the next few months. In addition to the debt,
Golding mentioned the upcoming divestment of money-losing state enterprises and
a property tax adjustment scheduled for April 1st. Finally, in trying to
convince viewers that this attempt at reform was different from previous
proposals, he emphasized the importance of IMF monitoring in ensuring that the
government meets its targets.
In order to explain the country's situation and the sacrifices that must be
made, Golding cited an analogy offered by one of his young supporters. Jamaica
is like a group of passengers trying to push a bus up a hill. Sometimes the bus
may roll back a little and sometimes they think that they cannot push anymore.
But, if all the passengers get out and push together they can get it over the
top of the hill. Once the bus starts rolling down the other side, they'll be
able to push-start the engine. After that, anyone left outside will have to run
to try to catch up.
As the IMF loan is contingent on near universal acceptance of the swap proposal,
the implementation of the swap over the next two weeks will prove critical.
Although Golding said that the swap is voluntary, we imagine that the government
could take a number of actions to coerce bondholders into accepting. The most
obvious is for the government to threaten to call the bonds for those investors
who do not tender them, leaving those investors uncertain with regards to the
rates at which they could re-invest the principal. More extreme measures could
include the previously discussed tax on high interest rate debt service and a
change in the type of assets that can be used to meet reserve requirements. We
expect the major financial institutions to participate. They are aware of the
debt problem, have been involved in discussions with the government recently,
and have sufficient reserves to accommodate the losses. We are less certain
about participation by smaller institutions and retail investors.
For external bond holders, the announcement is mostly good news. As we
predicted in our November note, the liability management program does not affect
the external bonds at all. Furthermore, the government did not ask for a
haircut on the domestic debt, and has made good on their repeated assurances
that they will honor their obligations. The government is not defaulting on
their debt and will remain current on all outstanding obligations. In this way,
their actions remain legal under the Jamaican constitution which gives priority
in government spending to debt service.
The bad news is that, under the S&P methodology, a distressed exchange offer,
whereby the government “tenders an exchange offer of new debt with
less-favorable terms than the original issue” would likely trigger a selective
default rating. This methodology seems reasonable to us in general. When an
issuer is near default, a “voluntary” debt exchange is not really voluntary.
In such cases, the government is telling creditors that unless they accept less
favorable terms, the government will have to default on its existing
obligations. We had hoped the government would implement the swap by exercising
the call option in the bonds in order to avoid an SD rating but apparently that
proved too complex.
For investors who have not been following the situation closely, the headline of
a restructuring and especially a SD rating could be shocking. On the other hand,
for those investors who feared a more severe restructuring, the announcement
should provide relief. These investors were well aware of the unsustainability
of the government's debt profile, and with S&P having had a negative outlook on
its CCC rating, we do not see much of a negative surprise from any ratings
actions going forward. We suspect that the majority of investors who still
hold Jamaican bonds after all the negative news of last year are more likely to
be in the latter group. The announcement today helps to resolve much of the
uncertainty surrounding the conditions of the IMF program and brings Jamaica
closer to receiving disbursements from the IMF and other multilaterals.
Also important to future price action is how local investors will respond, as
they, after all, are the ones who hold most of the debt. Some observers may
fear that the restructuring may cause local investors to panic, selling all of
their Jamaican debt and moving their money offshore. We doubt that will happen
in any large volume. Most large financial institutions in Jamaica never marked
down their holdings of Jamaican debt; it was decided that due to the financial
crisis after the Lehman Brother's collapse, market prices were not
representative and as a result the bonds remain on the books at market prices
from August 2008. If these institutions were to sell the external debt now,
they would have to recognize these losses, in addition to the losses they will
soon incur on the local debt. These institutions prefer to hold the bonds to
maturity. (Incidentally, that is also the reason the bonds have not been very
liquid recently.).
Besides, where else can local investors earn the 11-12% yields that the external
debt is paying? The domestic debt swap and the central bank's reduction of
domestic interest rates actually makes the external debt much more attractive.
Before, investors could choose between a 25% yield on local currency debt or a
12% yield on external debt. With local short rates in Jamaica now reduced to
10.5%, external debt becomes a way for investors to earn the same yield as the
local debt without assuming any currency risk.
In order for Jamaica to start receiving IMF funds, it must gain near universal
acceptance of its swap proposal from local investors by January 26, in time for
the IMF board meeting. If Jamaica cannot meet that deadline, it may have to
wait for the next IMF meeting in March. Although accomplishing a swap of so
much debt poses huge organizational and administrative difficulties, the
government intends to try. In the next couple of weeks, investors should look
for updates on acceptance rates while keeping an eye on bank deposits and
exchange rate pressures. If the debt exchange is successful and the financial
system remains stable, external bond prices should benefit substantially in the
medium term.
Jamaica announces debt swap to push-start the economy
By Joe Kogan, Scotia Capital
January 13, 2010
In a televised address to the nation this evening, Jamaican Prime Minister Bruce
Golding revealed to the nation his administration's proposal for reducing the
country's domestic debt burden. In a debt exchange to be launched tomorrow,
holders of J$700bn of local debt with interest rates up to 28% will be asked to
swap such debt for new bonds with lower interest rates and longer maturities.
Such a swap will save Jamaica J$40bn in debt service per year. More
importantly, it will open up the way for $1.3bn in IMF funding and $1.1 bn in
multilateral development bank funding over the next 27 months, with half of that
amount to be distributed over the next few months. In addition to the debt,
Golding mentioned the upcoming divestment of money-losing state enterprises and
a property tax adjustment scheduled for April 1st. Finally, in trying to
convince viewers that this attempt at reform was different from previous
proposals, he emphasized the importance of IMF monitoring in ensuring that the
government meets its targets.
In order to explain the country's situation and the sacrifices that must be
made, Golding cited an analogy offered by one of his young supporters. Jamaica
is like a group of passengers trying to push a bus up a hill. Sometimes the bus
may roll back a little and sometimes they think that they cannot push anymore.
But, if all the passengers get out and push together they can get it over the
top of the hill. Once the bus starts rolling down the other side, they'll be
able to push-start the engine. After that, anyone left outside will have to run
to try to catch up.
As the IMF loan is contingent on near universal acceptance of the swap proposal,
the implementation of the swap over the next two weeks will prove critical.
Although Golding said that the swap is voluntary, we imagine that the government
could take a number of actions to coerce bondholders into accepting. The most
obvious is for the government to threaten to call the bonds for those investors
who do not tender them, leaving those investors uncertain with regards to the
rates at which they could re-invest the principal. More extreme measures could
include the previously discussed tax on high interest rate debt service and a
change in the type of assets that can be used to meet reserve requirements. We
expect the major financial institutions to participate. They are aware of the
debt problem, have been involved in discussions with the government recently,
and have sufficient reserves to accommodate the losses. We are less certain
about participation by smaller institutions and retail investors.
For external bond holders, the announcement is mostly good news. As we
predicted in our November note, the liability management program does not affect
the external bonds at all. Furthermore, the government did not ask for a
haircut on the domestic debt, and has made good on their repeated assurances
that they will honor their obligations. The government is not defaulting on
their debt and will remain current on all outstanding obligations. In this way,
their actions remain legal under the Jamaican constitution which gives priority
in government spending to debt service.
The bad news is that, under the S&P methodology, a distressed exchange offer,
whereby the government “tenders an exchange offer of new debt with
less-favorable terms than the original issue” would likely trigger a selective
default rating. This methodology seems reasonable to us in general. When an
issuer is near default, a “voluntary” debt exchange is not really voluntary.
In such cases, the government is telling creditors that unless they accept less
favorable terms, the government will have to default on its existing
obligations. We had hoped the government would implement the swap by exercising
the call option in the bonds in order to avoid an SD rating but apparently that
proved too complex.
For investors who have not been following the situation closely, the headline of
a restructuring and especially a SD rating could be shocking. On the other hand,
for those investors who feared a more severe restructuring, the announcement
should provide relief. These investors were well aware of the unsustainability
of the government's debt profile, and with S&P having had a negative outlook on
its CCC rating, we do not see much of a negative surprise from any ratings
actions going forward. We suspect that the majority of investors who still
hold Jamaican bonds after all the negative news of last year are more likely to
be in the latter group. The announcement today helps to resolve much of the
uncertainty surrounding the conditions of the IMF program and brings Jamaica
closer to receiving disbursements from the IMF and other multilaterals.
Also important to future price action is how local investors will respond, as
they, after all, are the ones who hold most of the debt. Some observers may
fear that the restructuring may cause local investors to panic, selling all of
their Jamaican debt and moving their money offshore. We doubt that will happen
in any large volume. Most large financial institutions in Jamaica never marked
down their holdings of Jamaican debt; it was decided that due to the financial
crisis after the Lehman Brother's collapse, market prices were not
representative and as a result the bonds remain on the books at market prices
from August 2008. If these institutions were to sell the external debt now,
they would have to recognize these losses, in addition to the losses they will
soon incur on the local debt. These institutions prefer to hold the bonds to
maturity. (Incidentally, that is also the reason the bonds have not been very
liquid recently.).
Besides, where else can local investors earn the 11-12% yields that the external
debt is paying? The domestic debt swap and the central bank's reduction of
domestic interest rates actually makes the external debt much more attractive.
Before, investors could choose between a 25% yield on local currency debt or a
12% yield on external debt. With local short rates in Jamaica now reduced to
10.5%, external debt becomes a way for investors to earn the same yield as the
local debt without assuming any currency risk.
In order for Jamaica to start receiving IMF funds, it must gain near universal
acceptance of its swap proposal from local investors by January 26, in time for
the IMF board meeting. If Jamaica cannot meet that deadline, it may have to
wait for the next IMF meeting in March. Although accomplishing a swap of so
much debt poses huge organizational and administrative difficulties, the
government intends to try. In the next couple of weeks, investors should look
for updates on acceptance rates while keeping an eye on bank deposits and
exchange rate pressures. If the debt exchange is successful and the financial
system remains stable, external bond prices should benefit substantially in the
medium term.