The Technical Minister of the Presidency Temistocles Montas and the President’s economic advisor Julio Ortega Tous announced yesterday the official government offer to exchange US$1.1 billion in global bonds for a longer dated debt. The offer is open until 4 May 2005. The offer was made in an effort to generate some US$100 million in debt service relief over the next 18 months. The operation would extend the due dates of the bonds that were issued in 2001 and 2003 until 2011 and 2018, respectively, according to El Caribe. The bonds would still carry the 9.5% and 9.05% interest rates. Both Montas and Ortega emphasized that the offer depends on at least an 85% participation rate of the current bondholders. Both men expressed confidence that the participation rate would be reached “with ease.”
An added benefit of the offer will be avoiding a default on the current issue which would “stain the impeccable record (of the DR)” that has managed to fulfill its international obligations, so far. Authorities had already announced the payment of US$23.75 million last 27 March on the 2001 bonds.
Speaking at the Presidential Palace, both Ortega and Montas offered details of the new proposal that will be open to the bondholders until 4:15 EDT on 4 May in New York City. Among the items mentioned was the inclusion, for the first time, of Collective Action Clauses that means that in the future government proposals for re-structuring can be approved by a 75% majority of the bondholders and the remaining 25% must accept also.
Montas also revealed that in Okinawa, Japan government officials were supposed to have said that “the Dominican Republic reserved the right to cancel the exchange if the approval of bondholders does not reach 85% and not pay those bondholders that refused to participate in the exchange offer.” In turn, this statement was interpreted by Franco Uccelli, a financial analyst for Bear Stearns, as saying “even though the Government appears to have confidence in the success of the operation, they could be inclined to adopt a strong position against those investors that did not offer their bonds and participate in the exchange. The message seems clear: watch out those that choose not to participate.”
Nonetheless, Ortega Tous, the economic advisor, seems to have sweetened the “pill” a little. He said that the government had not taken a decision not to pay the stubborn bondholders, but “the country does reserve the right to give the treatment it considers necessary to those investors that do not participate, which could be to respect their rights as well as to not pay them.”
The entire operation will be channeled through The Bank of New York as the exchange agent.
An added benefit of the deal will be that the country will fulfill the Paris Club’s ‘comparability of treatment’ requirements that have long been a sticking point in the negotiations with the Club. If the deal goes through, the Dominican Republic will not pay the interest bearing coupons on the 2001 and 2003 bonds for the rest of 2005, and will only pay 50% of the interest in 2006. The new bonds will be identified by their maturity dates, September 20011 for the 2001 bonds and January 2018 for the 2003 bonds. The payments will be every six months starting in March 2007 and September 2011. According to Ortega Tous, this will give the country a breather with respect to its cash flow during 2005 – 2007, and beginning in 2007 the coupons will be paid off 100% as they come due.