Uruguay takes cooperative approach to a successful debt exchange

Pages201-206

Page 201

On May 29, the government of Uruguay successfully exchanged most of its market debt (about half of its total debt) for new bonds with longer maturities and roughly unchanged interest rates.

The exchange, which provides crucial debt-service relief to a country that has battled external shocks, a severe financial crisis, and a deep recession, constitutes a key component of Uruguay's efforts to restore economic vitality. Gilbert Terrier (Western Hemisphere Department), Rupert Thorne, and Peter Breuer (both International Capital Markets Department) examine the exchange's design, why bondholders responded so favorably, and whether this successful effort might hold lessons for other countries contemplating a similar operation.

Uruguay stresses consultation, communication

At the beginning of 2003, the Uruguayan economy confronted major challenges: output had declined by over 17 percent in the four preceding years, the public debt-to-GDP ratio was approaching 100 percent, the banking system had been hit by a crisis, and the country's credit rating had collapsed. The government was not able to issue new market debt of more than a few weeks maturity, and large residual financing needs were projected to persist for the foreseeable future.

To address these challenges, the authorities were implementing a comprehensive economic program, supported by an exceptionally large Stand-By Arrangement from the IMF and assistance from the World Bank and the Inter-American Development Bank. After initiallyPage 203 focusing on stabilizing the economy through fiscal adjustment (while preserving the social safety net), an exchange rate float, and measures to address the banking crisis, the authorities next turned to designing a debt operation which would close the financing gaps in the next few years and ensure a sustainable mediumterm debt profile.

Designing the exchange

With these goals in mind, the Uruguayan authorities, in close coordination with their legal and financial advisors,moved to develop a comprehensive debt exchange that would elicit a high participation rate, while lengthening maturities and reducing the net present value (NPV) of their debt. To achieve this, they aimed for a voluntary exchange that would treat bondholders equally and employed a strong communications strategy that would convince investors of the benefits of participation.

They structured the exchange to cover international and domestic bonds, with principal totaling $5.4 billion eligible for exchange (equivalent to 45 percent of the country's GDP). They divided the operation into three simultaneous offers for the old bonds: 46 domestically issued securities, totaling $1.6 billion; 18 international bonds, totaling $3.5 billion; and one Japanese bond of about $250 million.

The first two offers were structured as exchanges for new bonds, while the Japanese bond was to have its terms amended at a bondholders' meeting. Eligible bonds were primarily denominated in U.S. dollars, and their remaining maturity ranged from a few days after the offer closed to the year 2027.

"Selling" the debt exchange required, above all, communicating clearly to bondholders what its aims and expected outcomes were. From early on, the authorities took a market-friendly approach...

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