A less than orderly rush to restructure debt

EDUARDO KAPLAN, Dow Jones Newswires Friday, March 28, 2003 (03-28) 11:49 PST (AP)

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NEW YORK (Dow Jones/AP) -- For all the talk about orderly debt restructuring, every day seems to bring news of a new Latin American government or company rushing to exchange its bonds.

The latest to join the growing line was the market-unfriendly government of Venezuela President Hugo Chavez, who announced Wednesday his cash strapped country will seek to exchange part of its foreign debt.

The news came just as Uruguayan officials were flying back home after an international roadshow to discuss a debt exchange that could reach $5 billion.

Meanwhile, several local and foreign companies that went on a shopping spree throughout the region in the 1990s are now dealing with devalued assets, depreciating currencies and lowered growth expectations.

A unit of Spain's Endesa in Chile, Brazil's local divisions of U.S.-based AES Corp., and Mexico's TV Azteca are some of the names talking to creditors about their debt burdens.

Still hovering over the horizon is the massive restructuring that Argentina will have to eventually face following its sovereign debt default in late 2001, which surpassed the $100 billion mark and triggered the country's unprecedented economic collapse.

It's hard to pin down a total figure, but Jose Barrionuevo, director of emerging market strategy at Barclay's in New York, has seen enough to call Latin America the most leveraged region in the emerging market sector.

"I can't remember a time like this," said Barrionuevo. "It's a reflection of a weak global environment which suggests things may not be improving soon, but it's worse for many of these economies since they have been in recession or close to one for three or more years. We won't have a new credit cycle until the U.S. starts growing."

Global investors who have been dealing with a fair share of bursting credit bubbles in the past three years may temporarily overcome their debt restructuring fatigue and listen to some of the latest overtures by sovereign issuers.

After all, as a recent Lehman Brothers report pointed out, debt restructuring under the threat of default is still preferable to outright default.

Uruguayan officials attested to this sentiment last week after a round of meetings with U.S. investors. The country's central bank president, Julio de Brun, said reactions were better than expected. Venezuela will likely meet willing parties, judging by the early responses.

"This is a rush, but it's more orderly than the credit restructuring in the 1990s," said Christian Stracke, head of emerging market research at independent research firm CreditSights.

Stracke was referring to the sovereign debt crises in the latter part of the decade following debt defaults by Russia, Ukraine and Ecuador.

"I think that Uruguay and Venezuela are showing that they have learned some lessons from what happened to Ecuador and Russia, for instance. They are trying to approach creditors first, instead of defaulting. They are addressing a problem of temporary liquidity, not of solvency," Stracke said.

This palpable sense of progress is a welcome development, but being able to talk to investors will amount to nothing more than good intentions if no deals are struck.

Barclay's Barrionuevo questions the prospects of the latest debt exchange offers if Uruguay and Venezuela can't come up with decent incentives for bondholders. He also said he expects Ecuador to join the ranks and start talks with creditors in the second half of the year.

Bad as conditions sound for sovereign issuers, they are even tougher for companies trying to restructure debt.

"I think in many cases you have a solvency problem," Stracke said. "Many of these companies are operating in environments where there are no sources of financing and economies aren't posting growth."