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. Last Updated: 07/27/2016

Russia Bond Deal Sets Future Tone




NEW YORK -- Russia's landmark deal with bondholders struck last Friday will set a precedent for quick, pragmatic and market-friendly bond restructurings in the years to come, a top official of the international bond industry has said.


"The Russian situation shows us that we should have greater confidence in the pragmatism of bondholders," said Michael Chamberlin, executive director of the Emerging Markets Traders Association.


The Russian debt accord "is possibly a positive indicator for Ecuador," the next major debt restructuring pending in the capital markets, Chamberlin said in an address organized by the Banco Santander Central Hispano.


Any new bond-restructuring agreements will likely follow the example set by Russia's accord in that they will involve exchanges of old securities for new ones in arrangements that tend to be more market-friendly, Chamberlin said.


"The investment community has been breathing easier over Russia. Some of the things that could have gone wrong in Russia didn't go wrong - bondholders didn't bring lawsuits and the situation didn't degenerate into chaos when bonds were effectively restructured," Chamberlain said.


Moscow and the London Club of commercial creditors agreed Friday to cut $31.8 billion of Soviet-era debt by about 36.5 percent and to stretch repayments of most of the remainder over 30 years. The restructuring accord closed the chapter on a cataclysmic August 1998 default that rocked global financial markets, paving the way for Moscow's return to capital markets.


Under the agreement, Russia would issue new 30-year Eurobonds to be swapped for the currently circulating bonds known as PRINs and IANs.


Russia would also issue 10-year Eurobonds to cover $2.8 billion in overdue payments accumulated since 1998.


Chamberlin pointed out that the 1989 Brady Plan, named after then-U.S. Treasury Secretary Nicholas Brady, helped many emerging nations, mainly from Latin America, return to the capital markets. It also helped creditors revive hopeless portfolios.


But the traditional debt-restructuring mechanism under the Brady Plan involved protracted negotiations between governments and "banks advisory committees" set up by major creditors.


Although no single model is likely to prevail in the future, Chamberlin said there is little appetite now for such protracted deals. Informal consultations like the ones recently carried out by Pakistan with its creditors or a formal consultative process with bondholders like the one suggested by Ecuador may be more suitable solutions.


Ecuador last September took the unprecedented decision to default partially on its Brady bond interest payments, saying it didn't have enough money to pay its creditors.


Economic chaos forced President Jamil Mahuad out of office in January.


He was replaced by his deputy, Gustavo Noboa, who has sent to Ecuadorian Parliament his predecessor's plan to dollarize the economy in a bid to pull the country out of chaos.


But Mahuad's plans for some sort of old-for-new-bonds swap were put on ice until Parliament votes on dollarization.


Chamberlin also said bonds should in principle not be made easy to restructure, since that could become an incentive for countries to default on their debts.