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The Use of Corporate Debt Restructuring Techniques in the Context of Sovereign Debt

Rodrigo Olivares-Caminal, Centre for Commercial Law Studies, Queen Mary University, London, UK

Introduction

Debt has been the largest source of capital flow to developing countries in the past fifty years. During the seventies and eighties, it took the form of syndicated loans. In the late eighties, due to a debt crisis in emerging economies and the fact that the biggest banks were highly indebted (a 287.7% average exposure of bank’s total capital), syndicated loans were replaced by bonds by means of the Brady plan.

Since the outset of the Brady Plan in 1989, Argentina, Brazil, Bulgaria, Costa Rica, the Dominican Republic, Ecuador, Ivory Coast (Cote d’Ivoire), Jordan, Mexico, Nigeria, Panama, Peru, the Philippines, Poland, Russia, Uruguay, Venezuela and Vietnam were able to restructure their unsustainable debt - mostly in syndicated loans - by the issuance of Brady bonds. These and other developing countries that did not default during the eighties and nineties continued issuing bonds on a regular basis to cover their budget deficits or simply to raise money from the capital markets, amassing enormous amounts of debt, sometimes unsustainable.

On the one hand, debts documented in syndicated loans were - in comparison - easy to restructure because they were restructured within the framework of the London Club. The London Club is an informal group of commercial banks that join together to negotiate their claims against a sovereign debtor.
On the other hand, bonds are more difficult to restructure. First and foremost, they are held by different types of creditors encompassing different interests. The interests of investment banks in keeping the debt performing due to accounting issues is not the same as that of a retail investor that has invested all his lifetime savings or the interest of a vulture fund that is trying to obtain an enormous gain. This becomes much more complicated if it is considered that sometimes there are many outstanding series, that they are subject to different applicable laws, and that their holders are scattered throughout the world.


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