Bondholders could make $14bn from emerging market restructurings, says Debt Justice

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Bondholders stand to make profits of $14bn on resolutions of sovereign debt crises that broke out from Ukraine to Zambia in recent years, according to calculations by a UK debt campaigner.

Restructurings under way or recently concluded in Ghana, Sri Lanka, Suriname, Ukraine and Zambia will provide over $30bn in debt relief for the countries in the years ahead. They will also deliver sizeable gains to investors over time, if governments avoid further defaults, Debt Justice said.

These profits could be worth more than a third of bondholders’ original outlay and are a sign that troubled economies are not being granted sufficient reductions in their borrowing, according to the campaign group.

“Debtors, for whatever reason, do not have enough power in negotiations, and are not getting enough relief to avoid restructurings in future,” said Tim Jones, policy director at Debt Justice.

The calculations will add to the debate on the success of initiatives in the past year to end a logjam in resolving a spate of sovereign defaults and Ukraine’s war financing in response to Russia’s invasion.

In recent months Ghana and Zambia have exited lengthy bond defaults, and Ukraine replaced a wartime payment suspension, after holders of Kyiv’s US dollar debt agreed to cuts in the value of their holdings.

Sri Lanka is also close to completing a long-delayed bond restructuring, while Suriname resolved a default last year.

These countries have also been doing deals with official creditors and other private lenders, but unlike bondholders the terms have generally not been fully disclosed, making it difficult to assess what returns they will make.

To arrive at the $14bn figure, Debt Justice assumed that investors bought half of their bonds when they were originally sold by governments, usually at face value, and half at market prices, which collapsed as defaults loomed and then in some cases took years to be resolved.

The profits are compared to the returns investors would have made buying US government debt over the same period, as a safe asset, and reflect both high interest payments on bonds before defaults, and the benefit of buying defaulted debt at low prices, Debt Justice said.

Theoretical profits would be as low as $1.9bn if all bonds were bought at face value and none of the upside payments were triggered, and as high as $26bn if all bonds were instead bought at low prices and attracted the maximum possible upside, according to the estimates.

“The caveat is that the calculations assume that the restructured debt will be repaid. It’s not that they’ve realised the profit yet. We think there are dangers of countries having to restructure again in the future,” Jones said.

The Debt Justice calculations underscore that “bondholders have got substantial upside” from Sri Lanka’s proposed restructuring and Zambia’s deal, said Brad Setser, senior fellow at the Council on Foreign Relations.

Several of the recent restructurings outside Ghana contain provisions that will reward bondholders with higher payouts if their economies outperform targets in the years ahead.

Triggers for these payments will typically be assessed at the point the countries are due to exit IMF bailouts in the next few years. That risks “debt levels that ironically create very real risks of distress, immediately after the programme periods”, Setser said.

While some of the restructurings such as Sri Lanka’s also have downside provisions to reduce payments in the event of future economic trouble, they do not go far enough, he added.

Investors and advisers to governments have nevertheless said that these so-called “contingent” payments have been needed in order to bridge deep disagreements over official projections of the post-default path of countries, and get negotiations over the line.