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Information about LACEApresJZ1

Published on October 26, 2007

Author: FunSchool


Haircuts:  Haircuts SCID, November 2004 Federico Sturzenegger and Jeromin Zettelmeyer (with thanks to four RAs and many colleagues) Personal views, do not necessarily reflect the views of the IMF Objectives:  Objectives Goal: to compare the losses incurred by investors in recent (1998-2003) debt exchanges using a consistent methodology Across debt exchanges For various classes of “old” instruments, within debt exchanges Were some exchanges “tougher” than others? Within exchanges, were investors treated equally in the sense of incurring similar NPV losses? Debt exchanges studied:  Debt exchanges studied Methodology:  Methodology Compute investor losses as the difference between present value of cash flow of old instrument and present value of cash flow of new instrument, both computed using the interest rate prevaling after the exchange Interest rate prevaling after the exchange = yield to maturity implicit in secondary market price of new instrument. Hence: “Haircut” = NPV(old, new yield) – P(new) * units obtained of new instrument (expressed as a percentage of NPV (old, new yield)) Methodology (cont.):  Methodology (cont.) Two practical problems: maturity of old and new instrument are typically not the same (new is usually longer), so need to adjust. interpolate between yields of new bonds use US yield curve Sometimes, currency of old and new instrument are not the same Compute NPV(old) using post-exchange yield of an instrument denominated in same currency use current market exchange rates to express NPV(old) and value of new instrument in same currency. Pakistan Exchange (Dec. 99):  Pakistan Exchange (Dec. 99) Current on debt payments until exchange (exchange imposed by Paris club) Three international bonds which were very close to maturity swapped into one new 10 percent Eurobond of longer maturity No nominal haircut; all PV haircuts achieved through maturity extension Pakistan Haircuts:  Pakistan Haircuts Ukraine Exchange (March 2000):  Ukraine Exchange (March 2000) Basically current on payments until exchange (missed one principal payment just before) Four international bonds and 29 “Gazprom bonds” swapped into two new Eurobonds of longer maturity (+ cash for accrued interest) Investors given a choice between a Euro and a US$ denominated bond with otherwise simlar terms With one exception, no nominal haircuts; PV haircuts achieved mostly through maturity extension Ukraine 2000 Haircuts:  Ukraine 2000 Haircuts Russian PRINs and IANs (August 2000):  Russian PRINs and IANs (August 2000) Had been in default on interest payments for long time (since 12/1998). PRINs and IANs (restuctured soviet era commercial bank loans) swapped into one new 2030 eurobond. Past due interest swapped into a shorter, 2012 eurobond + a small cash payment (9.5 percent). Significant face value reductions (33-37.5 percent). Russia PRINs and IANs Haircuts:  Russia PRINs and IANs Haircuts Ecuador (August 2000):  Ecuador (August 2000) Had been in default on interest payments for since 9/1999 First default on Eurobonds and Bradys, first restructuring of Bradys Five Brady and Eurobonds swapped into 2 new Eurobonds Investors given choice between 2030 and 2012 eurobond, but 2012 Eurobond rationed (shorter old instruments have priority). PDI and PDP paid fully in cash Significant face value reductions for longer old instruments; extra 35 percent reduction if elected 2012 bond; some maturity extension Ecuador Haircuts:  Ecuador Haircuts Uruguay external (May 2003):  Uruguay external (May 2003) Current on payments until exchange Involved 18 international bonds Swapped into 18 new international bonds with longer maturities Investors given choice between an “extension option” (similar coupon as old but longer maturity) and an “benchmark option” (liquid, longer dated benchmark bonds with fixed 7.25 or 7.5 percent coupons) No face value reductions Some cash payments Haircuts: in the order of 10-20 percent. Argentina Phase 1 (November 2001):  Argentina Phase 1 (November 2001) Current on payments until exchange Huge exchange (60 mostly international bonds; $41 bn tendered) Targeted resident bondholders (pension funds, banks). Regulatory incentives (could value at par) Swapped into same currency “guaranteed loans” serviced by FTT Generally 2 options: small maturity extension (<=3 years) and either reduced fixed interest rate (by 30%) or short term, reduced floating rate (libor+300). For some shorter bonds, also offered 3rd option (10 year capitalizing bond). No face value reductions No cash payments Haircuts: 30-50 percent (with outliers above this range) Haircuts for Domestic Law Instruments:  Haircuts for Domestic Law Instruments Russia MinFin ($ to $, foreign holders): 55 percent. Russia GKO (Rb to Rb, mix of holders): 15-25 percent. Ukraine OVDP (Hrv to $, foreign holders): 50 percent Ukraine OVDP (Hrv to Hrv, domestic holders): 8 percent Argentina pesification ($ to AR$, domestic):25-50 percent Uruguay domestic ($ to $, domestic holders):15-20 percent For Uruguay, domestic and external holders fare about the same (domestic a bit worse) For Ukraine and Russia, domestic holders seem to fare much better. But caveat: haircuts disregard effect of currency crisis. Haircuts much higher if compare values of NPV(old) and NPV(new) in dollars, evaluated at pre and post crisis exchange rates, respectively. In summary ...:  In summary ... Conclusions:  Conclusions Haircuts vary widely across exchanges: Uruguay smallest (10-20 percent); Russia external largest (50 percent); others in-between. In all exchanges, see differences in haircuts across instruments, sometimes substantial: Pakistan, Russia, Ukraine, Ecuador: longer maturities lose less Uruguay, Argentina: no pattern. Interpretation: Exchanges that tried to adjust for maturity differences through different face value reductions ended up “underadjusting” (not clear why) Exchanges that tried to adjust for maturity differences ex ante through different maturities ex post do not seem biased towards longer maturities

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