October 28, 2024
Patterson Belknap Attorney Served as
Independent Examiner in FTX Bankruptcy Case
Firm Serves as Counsel to the Examiner
Independent Examiner in FTX Bankruptcy Case
Firm Serves as Counsel to the Examiner
Update on Sovereign Debt Restructurings
January 24, 2024
In 2023, the economies of some nations stagnated, but developing economies particularly struggled. As a new year commences, some of these countries will continue their efforts at restructuring their debts—a process that has been going on for years.
Back in February 2020, the International Monetary Fund (IMF) published a report finding that half of low-income countries were at a high risk for debt distress or were already in debt distress. When the pandemic hit, the financial burdens faced by these countries only increased. In May 2020, the G20 nations responded by creating the Debt Service Suspension Initiative (DSSI), which suspended debt service payments for some of these low-income countries upon request from such countries.
Although the DSSI was undoubtedly successful–providing $12.9 billion in relief to 48 different countries during the approximate year and a half that the program was in effect–the relief was temporary because the initiative did not address more large-scale issues. For that, the G20 needed to create a comprehensive debt restructuring program. In November 2020, the G20 launched the Common Framework for Debt Treatments, a mechanism meant to speed up the process for dealing with more protracted liquidity issues.
Under the Common Framework, the debtor’s official bilateral creditors[1] first participate in transparent negotiations with the debtor to establish the “key parameters” of debt treatment. The goal is to establish an agreeable framework that will fairly distribute the burden among the creditors. The key parameters may include changes to nominal debt service, debt reduction in present value terms, and extension of the claims. Once agreed, the key parameters will be set out in a non-binding Memorandum of Understanding, which will then be implemented through bilateral agreements between the official bilateral creditors and the debtor country.
Beyond the claims of participating official bilateral creditors, the debtor is also required to seek agreements on the treatment of claims held by other creditors, including private creditors. Such treatment must be at least as favorable as the treatment of the official bilateral creditors using the principle of comparability of treatment. To assist debtors in these negotiations, the Common Framework relies on an IMF financing program.
The Common Framework was initially met with optimism, in particular because it united the official bilateral creditors from both the traditional “Paris Club” countries, such as France and the United States, as well as newer creditor countries, such as China and India. Since its inception over three years ago, Chad, Ethiopia, Ghana, and Zambia have all made requests for debt relief under the Common Framework. Although little progress has been made in any of these countries, as we enter a new year, and new fiscal quarter, some of these debtors are hoping to make important strides.
For example, Ghana first sought a restructuring under the Common Framework in January 2023 (making it the most recent country to do so), and quickly obtained $3 billion in financing from the IMF. The IMF immediately made $600 million of the financing available with subsequent tranches to be made available depending on Ghana’s restructuring progress. This was a good first step, and observers were hopeful because of how quickly the IMF financing was obtained, but the restructuring hit a major obstacle regarding the appropriate “cut-off date.” This question was critical because any debt incurred after the cut-off date would not be restructured.
Kicking off the new year right, Ghana’s creditors agreed last week to set the cut-off date for December 2022. Along with this agreement came a larger agreement on a restructuring of $5.4 billion in loans, which was announced on January 12. This agreement, which still needs to be memorialized in a memorandum of understanding, should allow Ghana to access its next tranche of IMF funding so the country can continue this momentum as it seeks to restructure a total of $20 billion in external debt.
While Ghana only started the Common Framework process last year, Zambia was already making substantial strides. Unfortunately, hope for a major breakthrough was dampened in November 2023 when the official bilateral creditors rejected a deal Zambia had reached with certain investment and pension funds holding $3 billion in bonds on the basis that the deal failed to provide for comparability of treatment. Despite the setback, Zambia is still working towards a deal. The country hopes to reach an agreement on the restructuring of that bond debt during the first quarter of 2024, but the first step is coming to an agreement on what is meant by comparability of treatment, which has proven to be a difficult task.
Restructuring professionals around the world will certainly be watching closely to see whether the Common Framework can obtain tangible wins early on this year. Because experts predict that economic growth will be sluggish in 2024, it is even more important that Ghana and Zambia are able to make substantial progress early in the calendar.
[1] Official bilateral creditors are sovereign governments, or their appropriate institutions, that loan money to another government or public entity.
