If There is a Next Restructuring... Buchheit & Gulati

Transcription

1 If There is a Next Restructuring... Buchheit & Gulati

2 LCB sfour Rules of Restructuring Rule 1: First Restructuring With New Technique is Always the Easiest But the Market Learns --Investors Demand Protection Rule 2: Second Restructuring Will Require a Modification of the Technique Rule 3: Second Restructuring Will be More Difficult; More Expensive

3 Data Contracts Provisions Purchases by Foreign Investors (Cross Border) Coded Approx. 60 different provisions Evolution over 200 years ( ) For Modern data Dealogic; Thomson One Banker

4 LATIN AMERICAN DEBT CRISIS ERA: ENFORCEMENT Latin American Crisis (Enforcement)

5 LATIN AMERICAN DEBT CRISIS ERA: ENFORCEMENT The Riskier Ones -- Brady Restructurers N.B. General Market Practice in (parenthesis).

6 THE CAC SHIFT The Next Crisis -- Mexico/Argentina

7 THE CAC SHIFT The Riskier Ones - Bailout Likely Nations N.B. General Market Practice in (parenthesis).

8 EUROZONE FORMATION: RESTRUCTURING Eurozone Formation (Periphery Nations) N.B. General Market Practice in (parenthesis).

9 RECENT EUROZONE EVENTS Eurozone Crisis Greek Clauses

10 RECENT EUROZONE EVENTS Rest of the Periphery??? (Belgium, Ireland, Italy, Portugal, Spain)

11 RECENT EUROZONE EVENTS Eurozone Center (Austria & Finland)

12 What is Going On with Foreign Investors? Irrational Exuberance? They Believe that Greece Was Unique? Crisis is Over? BUT Hedge Funds are Calling Us Asking: How to Find Foreign Law Spanish and Portugese Bonds?

13 Possible Answer Foreign Investors in EurozonePeriphery Bonds are like the Dinosaurs Extinct Purchases Over the Past Two Years of Periphery Bonds are almost exclusively Local Banks or Other Periphery Country Banks Their Incentives are Different (and Scary)

14

15 Three Options Option One: Greek Style Haircut As of late 2011, about 50% of the Italian debt was still held by foreign investors (unlikely) Option Two: Reverse Greece Reduce Costs by an Exchange of Local for Foreign Bonds (But you cannot default on the Greek holdouts) (unlikely) (but w/ Option Three?) Option Three: Extension of Maturities Plan A and Plan B.

16 Lee s Notes 1. The obsessive fear of restructuring leading to an immensely costly two-year delay in commencing the process. 2. The conflation at senior levels of concepts such as Event of Default, Credit Event; Selective Default and simple default. The nameless dread phenomenon. 3. The failure to understand the significance of the CDS market.

17 Lee s Notes 4. The failure --at each stage --to prepare for the next stage of the crisis, no matter how obvious. 5. The decision, by default, to anoint IIF as a (as "the") negotiating counterparty for PSI. The conduct of the negotiations. 6. Unrealistic participation expectations, delaying the retrofit CAC.

18 Lee s Notes 7. How to restructure sovereign debt held predominately by locals. 8. The treatment of sovereign guarantees in a debt restructuring. 9. The coming OSI.

19 Plan B A purely hypothetical exercise from my class last semester (that just ended a couple of weeks ago).

20 LCB sfourth Rule Look at the Problem From the Other End We have been thinking about Stopping the Fire from Starting (but it has started) What are the Markets Most Worried About? (The fact that there isn t enough water if the really big fire occurs) What if we could Show then (without any need for bailout or austerity) that big fire would not occur?

21 ITALY -- Debt Due by Type and Year (as of February 29 th, 2012)

22 Think Back to the Greek Restructuring It was easy (relatively) because over 90% of the bonds were under local law Is there anything easier than restructuring a local law bond? Hell No! But, wonders never cease (maybe... ) Maybe, a bond where the Ministry of Finance could simply wave a magic wand?

23 Decree Bonds 94% of Italian Outstanding Debt is Under Decree Bonds (that is 94% of Euro 1.6 trillion) Art. 3: In each financial year, the Ministry has the authority, within the annual limits established by the budgetary law, to issue framework decrees that allow the Treasury to... proceed, in order to restructure the national and external public debt, to the reimbursement before maturity of bonds, to the transformation of maturities...

24 Decree Bonds 94% of Italian Outstanding Debt is Under Decree Bonds (that is 94% of Euro 1.6 trillion) Art. 3: In each financial year, the Ministry has the authority, within the annual limits established by the budgetary law, to issue framework decrees that allow the Treasury to... proceed, in order to restructure the national and external public debt, to the reimbursement before maturity of bonds, to the transformation of maturities...

25 Complications I don t know Italian, let alone Italian Law I ve never even been to Rome But the statute seems clear. Art 8 is the constraint and it says: The payments of public debt are not reduced, paid lateor subject to any special levy, not even in case of public necessity.

26 Decree Bonds Maturing after 2012: Coupon Rates as a Percentage of Outstanding Debt

27 Tracy Allowayof the FT said (in the Greek Context) To Avoid Restructuring Losses, A Loophole if in one s Hold-to-Maturity book If the coupon is maintained, but the maturity is extended, and the probability of receipt remains unchanged (or is improved)... the impairment charge would be zero (or very small).