DEBT IN THE TIME OF CORONAVIRUS
Restructuring of Export and Development Debt Should Support Impaired Business.
By Donald (“Skip”) Bean, Jr., La Cima International, LLC
The economic car wreck from coronavirus is particularly severe in commodity- and tourism- centric emerging market economies, as both commodity prices and tourism have plummeted. This is reflected in the decline of emerging market currencies (e.g., the Colombian Peso is down 14% last month – March 2020). The currency devaluation will exacerbate defaults, with many foreign businesses unable to repay USD- or Euro- denominated loans in their depreciated currencies.
Emerging market lending institutions have the reputation of being conservative, costly, and slow – a factor that pushes many local businesses to seek international credit. So how international financial institutions deal with the impending wave of defaults will impact the time and strength of recoveries in developing markets. Some institutions motivated solely by economics and fear may use standard loss mitigation protocols – get what they can from collateral and executable assets.
Turn-Around Restructuring and Additionality:
EXIM and DFC (the rock star formerly known as OPIC), and their respective foreign counterpart export credit agencies (ECAs) and development finance institutions (DFIs), are different. They have to concern themselves with “additionality” – the idea they should provide credit and cash where the private sector won’t. Such institutions may make risky investments whose impact is amplified by private sector co-investment. While additionality is traditionally only considered when these institutions extend new credit, it now needs to play a role in debt restructures as well.
- EXIM needs to be prepared in selected cases to support exports to distressed foreign buyers who restructure their covered debt (conditioned on the debtor’s compliance with the restructure terms). The supply chain from U.S. exporters on which foreign customers rely should be sustained wherever feasible.
- DFC needs to be prepared to restructure loans to sustain development projects and businesses. Among the arsenal of powers at DFC’s disposal in this regard are those recently granted by Congress when late last year OPIC became the DFC. These include the authority to lend in local currencies, to guaranty third party debt, and to make direct equity investment.
Of course, these imperatives apply equally to foreign and multilateral ECAs and DFIs.
Example of a Turn-Around restructure
Here’s an example of a turn-around restructure which a La Cima partner (Roel Messie) implemented in a former position as Director of Special Operations for FMO (the Dutch development bank):
- FMO’s borrower defaulted on a senior bank loan as a result of a business downturn and the depreciation of the Turkish Lira. The bank moved to foreclose notwithstanding the business’ prior successful track record. FMO, which had made a subordinate loan, “doubled down” by investing equity in the company alongside a private equity fund so as to enable the company to pay off the bank loan, and have a chance to regain its footing.
- The terms of the restructure gave FMO and the PE fund control of the board and real time visibility into the company finances. Dilution provisions strongly motivated the management to redeem the new equity expeditiously. The investment succeeded – within 18 months the company fully recovered, paid off the FMO debt, and redeemed the FMO/PE fund equity at a strong double-digit IRR. Importantly, the company was thereby preserved, as were the jobs of its more than 200 employees.
Key Role of Private Sector Partners:
EXIM and DFC and their foreign counterparts should look to the private sector for expertise and financial resources to leverage their internal restructuring capabilities. Private sector players with the relevant business, legal, and local market experience are essential complements to the public mission of these institutions. It would be helpful if reliable private sector partners are delegated certain restructure decision-making authority, so that time-sensitive solutions can be implemented on a streamlined basis.
Challenges and Opportunities
There are new challenges to restructuring international debt, including limitations on travel, difficulty in obtaining information (e.g., only being able to obtain desk, rather than field, audits), and limited access to courts and insolvency authorities (which will have overwhelming backlogs when they reopen).
But there are also new opportunities as well. Many of the new wave of debtors will be fundamentally sound businesses with competent management, long-standing relationships, proven business models, and successful track records. They will recover if only given the time and liquidity.
EXIM and DFC, in partnership with private sector partners, can implement strategies to facilitate the recovery of many impaired businesses.
By so doing, they will be assisting U.S. exporters, projects sponsors, and their foreign customers and partners. Importantly, their leadership in restructuring will reinforce the image of the U.S. as a loyal partner and help lay the groundwork for a broader economic recovery.