Buying bad debt at a premium?

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reilleyp

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Dec 12, 2006
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http://www.dr1.com/news.php#5

CDEEE moves debt to generators to Banco de Reservas

The governmental Banco de Reservas has picked up the debt that the Dominican government owes the Ege Haina electricity generation company. This US$251.6 million debt was taken on by the Banco de Reservas for US$309.1 million, as reported in Diario Libre.

Meanwhile, economist Alejandro Fernandez warns that the operation between EgeHaina and Edesur, Edenorte and EdeEste power distributors on 27 August 2015 by the CDEEE is illegal as only Congress can contract debt on behalf of the Dominican government. Fernandez comments that issuing bonds would have been a more transparent and less costly operation than that which was carried out to transfer the debt to the Banco de Reservas.


Amazing. Isn't bad debt usually bought at a discount?? Why would someone pay more for debt than what is actually owed? Is this bad reporting or bad decision making? I have not seen this much creating accounting since the US started QE1, QE2, QE3 . . . .
 
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playacaribe2

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Jan 9, 2004
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reilleyp said:
http://www.dr1.com/news.php#5

CDEEE moves debt to generators to Banco de Reservas

The governmental Banco de Reservas has picked up the debt that the Dominican government owes the Ege Haina electricity generation company. This US$251.6 million debt was taken on by the Banco de Reservas for US$309.1 million, as reported in Diario Libre.

Meanwhile, economist Alejandro Fernandez warns that the operation between EgeHaina and Edesur, Edenorte and EdeEste power distributors on 27 August 2015 by the CDEEE is illegal as only Congress can contract debt on behalf of the Dominican government. Fernandez comments that issuing bonds would have been a more transparent and less costly operation than that which was carried out to transfer the debt to the Banco de Reservas.


Amazing. Isn't bad debt usually bought at a discount?? Why would someone pay more for debt than what is actually owed? Is this bad reporting or bad decision making? I have not seen this much creating accounting since the US started QE1, QE2, QE3 . . . .
Click to expand...

Normally, traded debt is traded at a discount because the parties are unsure of future payment. if any.

However, in this case you have Banco de Reservas (quasi governmental bank) taking on debt of the government for a premium.

In a nutshell Banco de Reservas (BanReservas) is very well capitalized.....which is more than can be said of the government.

They have taken on the debt of the government (USD 251.6 million) and will be paid USD 309.1 for taking on and presumably paying that debt (side note the DR also owes well over 800 million to the power generators).

So BanReservas is paying the debt of USD 251.6 million and will be paid USD 309.1 million by the government at some later point in time. It's more of interest and carrying costs for taking on/paying the government debt.

The better question coming from Alejandro Fernandez is why the DR did not issue bonds to do the same thing?

The answer likely lies in the DR's current debt picture (they just floated bonds of 1.9 billion US to pay off Petrocaribe debt to Venezuela, its slim international reserves at 3.3 months of foreign debt obligations and a likely a US interest rate hike (most emerging market currencies will likely devalue following that event), which could come as soon as this Thursday.

Respectfully,
Playacaribe2
 
R

reilleyp

Well-known member
Dec 12, 2006
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playacaribe2 said:
Normally, traded debt is traded at a discount because the parties are unsure of future payment. if any.

However, in this case you have Banco de Reservas (quasi governmental bank) taking on debt of the government for a premium.

In a nutshell Banco de Reservas (BanReservas) is very well capitalized.....which is more than can be said of the government.

They have taken on the debt of the government (USD 251.6 million) and will be paid USD 309.1 for taking on and presumably paying that debt (side note the DR also owes well over 800 million to the power generators).

So BanReservas is paying the debt of USD 251.6 million and will be paid USD 309.1 million by the government at some later point in time. It's more of interest and carrying costs for taking on/paying the government debt.

The better question coming from Alejandro Fernandez is why the DR did not issue bonds to do the same thing?

The answer likely lies in the DR's current debt picture (they just floated bonds of 1.9 billion US to pay off Petrocaribe debt to Venezuela, its slim international reserves at 3.3 months of foreign debt obligations and a likely a US interest rate hike (most emerging market currencies will likely devalue following that event), which could come as soon as this Thursday.

Respectfully,
Playacaribe2
Click to expand...

So they asked BanReservas to pay the 251.6 million that the gov cannot pay, and in return the gov will pay them $309.1 million. Ha. They may as well have offered to pay them $1 billion. If they cannot pay the 251, they cannot afford the 309.1, so they may as well offer $1 billion because they are not paying that either. Looks like they have been studying the Greek situation. (If you lend me $7 billion, I will make the $1.7 billion dollar payment that I owe you)
 
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playacaribe2

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Jan 9, 2004
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reilleyp said:
So they asked BanReservas to pay the 251.6 million that the gov cannot pay, and in return the gov will pay them $309.1 million. Ha. They may as well have offered to pay them $1 billion. If they cannot pay the 251, they cannot afford the 309.1, so they may as well offer $1 billion because they are not paying that either. Looks like they have been studying the Greek situation. (If you lend me $7 billion, I will make the $1.7 billion dollar payment that I owe you)
Click to expand...

I am not sure if its a question of they can't pay, but rather they are attempting, for whatever reason, to move that debt off the government books quickly. It really is more of an accounting gimmick....and Alejandro Fernandez has called them out on it.

Floating new bonds would have added to the governments debt load and may have violated covenants they have with some international lenders. It clearly is out of the norm and one can only speculate as to why they did it.

Think of it this way. You want to purchase a house but have too much debt and that is reflected on your credit report. You call your son who agrees to pay off some debt in return for full payment plus interest.....so the credit report will now show the debt is paid. But, the debt is still there, just off the books and now unreported. Your debt/income ratio is now in line for that new loan.

It is an accounting trick with the balance sheet of the government,

The unanswered question at this point is why they did or are doing it this way.


Respectfully,
Playacaribe2
 
T

the gorgon

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Sep 16, 2010
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playacaribe2 said:
I am not sure if its a question of they can't pay, but rather they are attempting, for whatever reason, to move that debt off the government books quickly. It really is more of an accounting gimmick....and Alejandro Fernandez has called them out on it.

Floating new bonds would have added to the governments debt load and may have violated covenants they have with some international lenders. It clearly is out of the norm and one can only speculate as to why they did it.

Think of it this way. You want to purchase a house but have too much debt and that is reflected on your credit report. You call your son who agrees to pay off some debt in return for full payment plus interest.....so the credit report will now show the debt is paid. But, the debt is still there, just off the books and now unreported. Your debt/income ratio is now in line for that new loan.

It is an accounting trick with the balance sheet of the government,

The unanswered question at this point is why they did or are doing it this way.


Respectfully,
Playacaribe2
Click to expand...

excellent explanation, playa....
 
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