Recent Defaults on Foreign Currency: Restructurings Yet to be Completed
Keywords: Sovereign Defaults on Foreign Currency, Debt Restructuring, Negotiations, Zambia, Sri Lanka, Ghana, Ethiopia
In this post, we are going to have a look at recent defaults where a restructuring agreement is yet to be completed. You can also find our posts about the restructuring process in general and recent defaults where the restructuring is completed. First, let’s have a look at recent defaults on foreign currency. The countries that have yet to restructure their debt are marked with hyphens in the “time in selective default” column.
Zambia, October 2020
Zambia officially defaulted on October 21st, 2020. After one month of the announcement of the default, the expectations about negotiations getting closer to an agreement soon favored the prices. However, the deal did not happen. In 2024, expectations about a deal rose again. It should be noted that part of the recent price increase is the maturity getting closer.
Zambia bond price maturing in 2027
Currently, by May 2024, negotiations are about to come to a deal. In March 2024, the Zambia government said that bondholders would forgo about $840 million of their claims, and provide cash flow relief of approximately $2.5 billion during the IMF program period. That translates to a haircut of 21.6% of the total nominal face value of the bonds, including past-due interest. Under the previous deal that the bilateral creditors rejected, bondholders would have taken a 16% cut. This offer was rejected primarily by the Chinese government, with whom Zambia made a restructuring agreement earlier on defaulted bilateral loans. Chinese officials claimed that Zambia’s offer to bondholders with a haircut of 16% does not comply with comparable treatment principles.
Russia, April 2022 and Belarus, August 2022
Russia and Belarus went into default because of the sanctions, they were not able to pay in USD. They are fulfilling their obligations in Russian and Belarusian rubles, which is debatable if that means default or not.
Sri Lanka, April 2022
In March 2022, Sri Lanka’s foreign reserves were eradicated, resulting in a devaluation of the currency on March 8th. The spike in yields with an increase of 35.88% in two weeks stopped on the day of devaluation when the IMF said they were ready for talks, which was followed by the holding of the talks. On April 25th Sri Lanka officially defaulted on more than $12 billion in debt. Only for the case of Sri Lanka, prices were not at their lowest right before or on the default date, but after the default. This is because bondholders expected a fast IMF deal, which apparently has not happened, leading to a price crash. Negotiations are still ongoing and the market is simultaneously responding to the changing likelihood of a deal. From a trading perspective, buyers of Sri Lanka bonds in October 2021 when the prospect for a deal was very little have benefited.
Sri Lanka yield to maturity of the bond maturing in 2025:
Sri Lanka bond price maturing in 2025:
Ukraine, August 2022
When the war started on February 24th, 2022 (the yellow line on the chart below) bond prices crashed. Ukraine agreed with international investors to freeze the obligations for two years in August 2022. The international support for Ukraine facilitated the process to end in a week. Right now (May 2024), Ukraine seeks another restructuring to freeze once again the payments that are due in September 2024.
Ukraine bond price maturing in 2030.
Ghana, December 2022
Ghana defaulted on December 20th, 2022. Negotiations are ongoing regarding the $13 billion owed to bondholders. Contact between government officials and bondholders led to hope for restructuring and bond prices increased. The figure below shows that the bond market anticipated the default and thus yields reached their maximum before the default occurred. We also see the recent decrease in yields due to the increase in the likelihood of a restructuring agreement.
Ghana yield to maturity of the bond maturing in 2042.
El Salvador and Cameroon, 2023
El Salvador agreed with domestic pension funds to exchange its foreign currency debt obligations with a new mixture of debt certificates. Remained in default by S&P just for one day. Cameroon made late payments by two days. We do not consider those two instances of defaults to have significant effects.
Ethiopia, December 2023
Ethiopia became Africa’s third default in as many years on December 15, 2023; after it failed to make a $33 million coupon payment on its single international government bond. Africa’s second most populous country announced earlier this month that it intended to formally go into default, having been under severe financial strain in the wake of the COVID-19 pandemic and a two-year civil war that ended in November 2022. We see that again, the price crash right before the default. Since the default, the bond generated a 12.93% annualized return.
Ethiopia bond price maturing in 2024
To wrap up, even for the ones that are yet to get restructured, defaults can be an opportunity for investors in many instances. The selling of the bonds right before the default is likely to rebound afterward. The reason is that a substantial part of investors is institutionalized and subject to regulatory boundaries of credit ratings. In addition, some investors can not risk the halting of cash flows from the bonds. However, there are opportunities for other investors. Empirical evidence supports this approach, quoting from CEPR:
“Taking all crisis episodes, a constrained investor (seller due to default or default expectations) type would have realized an average annualized excess return of -1.8% at a Sharpe ratio of -0.1. In contrast, the distressed bond investor would have been able to reap an average annualized excess return of 17.2% at a Sharpe ratio of 0.9”
(We note that none of the comments in this post are investment advice.)
References
Chekir H., Cueva S., and González J. A. (2020). “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. (n.d.). Sovereign Debt: 200 years of creditor losses. IMF.
Bond returns in sovereign debt crises: The investors’ perspective | CEPR
https://gov.sr/restructuring-of-bondholders-finalized.
https://www.reuters.com/world/africa/ethiopia-becomes-africas-latest-sovereign-default-2023-12-26/
Sovereign Debt Restructuring: Overview | Practical Law (westlaw.com)
