A proper debt restructuring

It was never going to be the world’s largest sovereign debt write-down. That was Greece last week. Anyway, how could it. The Federation of Saint Kitts and Nevis is the smallest country in the Western Hemisphere. But did it have a big debt overhang — some 160 per cent of GDP.

Fortunately St Kitts and Nevis successfully closed an exchange offer for its bonds on Friday: (Click image for press release)

The island state launched the offer on February 27, so it’s been a bit overshadowed by Greece’s concurrent restructuring. This was rather unjust. St Kitts and Nevis is a relative debt minnow compared to Greece. It only has $1.1bn of debt overall. Compare that to the IIF’s task finding, and corralling, €100bn of debt relief from Greek bondholders. Even so, as you can read in the release above, the swap has won extremely strong support from creditors while also advancing the techniques of restructuring sovereign debt. White Oak Advisory helped to organise the swap financially. (Clifford Chance provided legal advice.)

Both sovereigns took about nine months each to talk through the terms of a swap with their creditors, but in St Kitts and Nevis’ case, clearly with far less rancour.

As Sebastian Espinosa of White Oak told us, St Kitts and Nevis will be only the fourth modern restructuring to successfully trigger collective action clauses in bonds. These bind all holders to the terms of an exchange if a certain majority votes in favour. The previous three sovereigns were the Seychelles, Belize… and Greece.

Like Greece, the old St Kitts and Nevis bonds were overwhelmingly governed by domestic law. They contain collective action clauses which will now help increase participation rates in the exchange. In St Kitts and Nevis’ case, to 100 per cent. Crucially though, unlike Greece, which had to implant its Greek law bond CACs retroactively, the CACs were always there in the bonds. St Kitts and Nevis law is umbilically tied to English law, where it’s been the norm for decades to use CACs in issuing debt.

It’s a strange parallel. Retroactive clauses had a dark genius in the Greek debt restructuring. Greece’s write-down was only ever going to be extremely painful to volunteer for. The fact that its private debt was almost entirely Greek-law made it possible to mop up participation through changing Greek law though.

It worked, but the long-term consequences for the principles of sovereigns engaging creditors on a fair and equitable basis remain unclear. (It will be particularly unclear within eurozone sovereigns for some time to come.) Not least because of the European Central Bank’s escape from a CAC-forced write-down. By contrast, St Kitts and Nevis has secured a 50 per cent write-down on face value (if bondholders swap into its new discount bonds) without any of this complication. All this and it is only the second sovereign to use CACs to restructure 100 per cent of its exchangeable debt.

Not bad really.

The huge underlying economic difference here (maybe the decisive one) is that St Kitts and Nevis already operated a primary surplus going into its bond swap. The swap itself has been approved by the IMF as part of a much broader fiscal programme by the way. It goes without saying that Greece hasn’t got to the stage of reaching successive primary surpluses, such that (as we think everyone recognises now) there will have to be a second debt write-down further down the line. Probably a vexatious one given the higher exposure of official creditors to Greece by that point.

Contrast St Kitts and Nevis. Maybe a much smaller debt crisis in absolute terms, but since it hit the country in 2010, St Kitts and Nevis neither ignored the need for debt restructuring nor rubbed up creditors the wrong way when it came to it.

Which, when so much of sovereign restructuring remains principle-based, matters.

Related links:
‘Pathological procrastination’ - Lee Buchheit (2011)
Like Greece, but better? – Reuters Global Investing

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