Recent Defaults on Foreign Currency and Restructurings: Ecuador, Suriname, and Belize
Keywords: Sovereign Defaults on Foreign Currency, Debt Restructuring, Ecuador, Suriname, Belize, Collective Action Clauses
Recently, we depicted the general picture of sovereign defaults on foreign currency and the restructuring process. Now, it’s time to move to recent examples.
In this post, we are going to go over recent debt restructurings of Ecuador, Suriname, and Belize after foreign currency defaults. First, let’s have a look at the below table about recent defaults on foreign currency.
Restructuring processes were conducted after Ecuador’s second default, Suriname’s second default, and Belize’s fifth default since 1975. Other default incidents, either they are solved with late payments where no restructuring was needed (El Salvador and Cameroon), or they remain in default because negotiations about restructuring are still ongoing, about which we will be talking in our upcoming post: “Recent Defaults on Foreign Currency: Restructurings Yet to be Completed”.
Our focus is on the restructuring of Ecuador since the debt amount was relatively high, with a variety of bonds with different maturities. In addition, we provide the price and yield movements with respect to the default, by using Bloomberg Terminal. Then we finish by touching on the cases of Suriname and Belize.
Ecuador, April 2020
Ecuador suffered from falling oil prices and the Covid-19 health crisis. Ecuador experienced a loss of over US$10 bn in fiscal revenues in 2020 compared to the original budget. This represented a nearly 25% revenue shortfall, equivalent to 10% of the GDP.
On March 24th, Ecuador publicly announced that it was facing severe liquidity shortages and was no longer able to fully meet its debt obligations. While the authorities decided to make the principal payment due on March 24th, 2020, they missed the coupon payments on the remaining bonds. This was rapidly followed by comprehensive debt restructuring negotiations and discussions on a successor IMF program. Before moving forward to the details of the restructuring, let us have a look at the response of bond yield and prices to the default.
Looking at the charts below we see the sharp fall in bond price and corresponding increase in yields due to increasing risk of default. The first chart (second chart) shows Ecuador bond prices (yields) maturing in 2040. From 03/03/2020 to 23/03/2020 the bond price(yield) fell (increased) by 74.02% (159.38%) annotated by the red dashed lines. On 24/03/2024, officials announced default and signaled a solution-oriented approach regarding restructuring negotiations, which is favored by the bond market and reflected as the start of rebounding in prices. With negotiations getting closer to an agreement around July 2020, the price and yields stabilized. It’s important to note that a comparison of prices before and after the restructuring (not the default) is not possible based on those charts, because maturities, coupons, and principal values changed at the restructuring on July 7th,2020.
The reason for the increase in prices following the default until the restructuring in June 2020 is the increasing prospect for a deal with bondholders, bolstered by the statements of Ecuador and IMF pointing to a fast restructuring.
Let’s move on to the restructuring process. Ecuador undertook one of the fastest sovereign debt restructuring processes in modern history. The consideration of debt restructuring began in early March 2020. IMF + Ecuador Government + 2 groups of bondholders' committees participated in the negotiating process.
Ecuador’s bondholders were divided into two groups. The first group consisted of institutional investors. This group had already organized itself as a creditor committee in Argentina. This group was quickly geared up to enter into the Ecuador discussions as they started. The second group, comprising a more diverse set of players also appeared in the discussion, but it took them longer to get organized. 2 limb voting was conducted: 50% for each series and 2/3 majority for the aggregated pool. The figures below from PR Newswire and Chekir et al. (2024) show the bond characteristics before and after restructuring on July 7th, 2020. Let’s begin with the summary of restructuring:
Going further, we can compare the defaulted and new bonds’ features.
How did the exchange take place exactly? As you can see from the table below, each bond was replaced with the precise proportions of new bonds determined by the agreement.
The last figure clearly shows the liquidity relief for the Ecuador Government.
Currently, Ecuador is again on the verge of default. The last coupon obligations were met in the grace period. Currently, Moody’s rating is Caa1 indicating a high risk of default. The next coupon payments are on August 31st, 2024.
Suriname, November 2020
The government of Suriname failed to pay too high interest rates amid a global low-interest environment in April and November 2020. The restructuring agreement was made in November 2023. For 3 years, bondholders did not receive any cash flow. The below excerpt from the government of Suriname explains the restructuring:
The two Eurobonds, capitalized at high rates of 9.25% (for the Bonds due 2026) and 12.875% (for the Bonds due 2023) and amounting to USD 912 million, were exchanged for
- a fixed-income instrument in the form of a new bond and
- a “value-recovery instrument” (“VRI”) in the form of an oil-linked security.
The new bond is issued with a face value of USD 660 million, a 10-year maturity (maturing in 2033), and a coupon of 7.95%. During the first two years, only 4.95% will be paid in cash with the remaining 3% capitalized. The new bond represents a 29% principal haircut on the original face value and accumulated past-due interest. After an initial USD 100 million of oil royalty revenues is allocated to the government, holders of the VRI will receive 30% of the yearly oil royalties from Block 58 until bondholders are compensated for the haircut they consented to.”
Specifically, the exchange for the two defaulted bonds took place as the following:
1. Holders of 2026 Bonds exchanged their bonds:
For each $1,000 principal amount of 2026 Bonds (including any and all associated Accrued Interest), a principal amount of New 2033 bond equal to $948.90.
For each $1,000 principal amount of 2026 Bonds (including any and all associated Accrued Interest), a notional amount of Oil-linked Securities equal to $459.38.
2. Holders of the 2023 Bonds exchanged their bonds:
For each $1,000 principal amount of 2023 Bonds (including any and all associated Accrued Interest), a principal amount of New 2033 bond equal to $1024.82.
For each $1,000 principal amount of 2023 Bonds (including any and all associated Accrued Interest), a notional amount of Oil-linked Securities equal to $ 496.13.
The numbers might be confusing. The government of Suriname claims that they made a beneficial deal for Suriname. However, according to the cash flow calculations of Marina Zucker-Marques on Debt Relief for Green and Inclusive Recovery, bondholders were the winners: If the default had not occurred, Suriname bonds would have had annualized returns of 9.3%. After the default and restructuring, the annualized returns were down to 7.1%, including the years when there was no payment to bondholders. If the oil project underlying the value-recovery-instrument happens to be successful, then the annualized returns become 8.4%. Those returns are very high considering the global low interest rates before 2022.
Suriname paid its first coupon payment on January 15th, 2024, since restructuring. Currently, Moody’s rating for Suriname is Caa1 indicating a high risk of a default.
Belize, May 2021
In November 2021, The Belize government and bondholders came to an agreement regarding a defaulted debt of $0.5 billion, with a 45% haircut, where bonds are bought back by the Belize government from bondholders at $55. At the outbreak of default, prices had fallen to $40. Belize managed to finance the repurchase of the bonds by taking institutional credit with climate change mitigation conditions. Quoting from Green Finance Institute:
“In November 2021, The Nature Conservancy (TNC) and the Belize government announced the completion of a $364 million debt conversion for marine conservation, the world’s largest debt refinancing for ocean conservation to date. The complex transaction enabled Belize to repurchase its superbond at 55 cents on the dollar, reduced the country’s debt by 12% of GDP, created long-term sustainable financing for conservation, and created a commitment to protect 30% of Belize’s ocean, among other conservation measures. Belize could not borrow the funds in the market to repay its existing bondholders, because the interest rate would have been too high to create savings, so instead TNC arranged a $364 million blue loan between the Belize Blue Investment Company (BBIC), a TNC subsidiary, and the Belize government, which allowed the country to repurchase its superbond.”
To conclude, quoting from Luckner et al. (2023) on the stylized facts about restructurings:
“1. There is a large heterogeneity in the size of haircuts.
2. Defaults are partial, with a median haircut of around 40 percent.
3. Serial restructurings are common, especially in recent decades.
4. Interim restructurings have smaller haircuts than final restructurings.
5. Haircuts are higher in the aftermath of (external) debt surges.
6. Haircuts are higher for low-income sovereigns.
7. Haircuts are higher for first-time-issuers.
8. Haircuts are especially high in case of geopolitical disasters (wars, revolutions, country break-ups).
9. Haircuts are higher for longer debt crises.
10. Haircuts are higher for deeper output contractions.” (p. 6)
(We note that none of the comments in this post are investment advice.)
References
Chekir H., Cueva S., and González J. A. (2024). “Lessons From the Ecuador 2020 Debt Restructuring Case”, Finance for Development Lab. Policy Note №15.
Luckner, C. G. V., Meyer, J., Reinhart, C. M., & Trebesch, C. (2023). Sovereign Debt: 200 years of creditor losses. IMF.
Government of Belize Debt Conversion for Marine Conservation (greenfinanceinstitute.com)
https://findevlab.org/wp-content/uploads/2024/04/FDL_Ecuador_Policy_Note_15_April2024.pdf.
https://gov.sr/restructuring-of-bondholders-finalized.
https://plumberinapantsuit.com/blog/the-belize-sovereign-debt-restructuring.
Sovereign Debt Restructuring: Overview | Practical Law (westlaw.com)
