Geoff Gottlieb of Goldman Sachs & Co. issued a 22 December release focusing on the key issues regarding the debt restructuring in the DR. He believes the government and the IMF have still to reach agreement on this issue in January.
His summary of what is pending is:
1) By end 2004, the authorities plan to clear all arrears except for US$60 million to external commercial banks. This is significantly more progress than we expected but it reflects new debt rather than higher than expected fiscal revenues. The primary means of financing these payments are (a) a loan from Banco de Reservas for US$85 million and (b) a US$100 million bridge loan still under discussion that will have a maturity of 2-3 years.
2) This implies that the financing gap for 2005 would be about US$ 250 million. This number includes the US$190 million financing gap expected next year for the non-financial public sector plus the US$60 million in arrears mentioned above. This size financing gap remains broadly consistent with the US$300 million we have been citing for some time.
3) The authorities have no intention at this time of filling the gap by returning to the market. They consider “market access” to have resumed when coupons return to levels at or below those of current bonds which are at 9-9.5%. Currently, rates are in excess of 10% on both bonds. Of course, if the authorities announced a decision not to restructure and liquidity remained abundant, the market could become more affordable but such an approach is not the government’s plan at this time.
4) As a result, the authorities plan to fill this gap with domestic and external resources including new money, restructuring, and reprofiling. On the domestic side, the government envisions two new bonds, one to replace a maturing bond and another to cover obligations to suppliers. On the external front, the authorities envision a rescheduling of a portion of commercial bank principle payments and a return to the Paris Club.
5) The authorities have not decided whether to capitalize coupon payments on bonded debt. The preference is to avoid such PIK structures but a decision has not been made. On the margin, capitalization would likely be about 50% of the coupon payments or US$50 million.
6) Regardless of how the authorities fill the gap in 2005, an extension of the bullet maturity on the 2006 via a debt exchange appears to remain an inevitable part of the plan. Note that such an extension in maturity (US$500 million) plus the rescheduling of commercial bank principle in 2005 would likely be adequate to satisfy the Paris Club’s comparability requirement.
7) The authorities view the combined restructuring/reprofiling as necessary to avoid default. In their view, a case in which they are unable to achieve such relief is likely to result in an inability to pay. For this reason, the authorities see participation as likely to be high as the incentive to come in to any exchange will be similar to that of Uruguay.
Next steps: First, watch for passage of the 2005 budget with particular attention to the any compromise of the 0.7% deficit target due to tax benefits to industry. Second, the authorities will use the approved budget to work toward finalizing financing plans with the IMF and clear the way for a multilateral program by end of January. And third, the government will likely announce a restructuring offer shortly after according to current plans. Throughout this process, do not forget the coupon payment on January 23rd; the government might use the 30 day grace period again to try and raise investor recognition of the fiscal constraint at hand and help increase participation in any potential exchange.