EMTA’s 25th Anniversary Panels in London
EMTA’s 25th Anniversary Panels “Emerging Markets - Then and Now” took place on May 16, 2106 at Allen & Overy’s London offices, followed by a cocktail reception. As EMTA’s old and new friends converged for the event, many remembered the past and appreciated the new lessons learned for the future.
Michael Chamberlin provided a warm welcome and introductory remarks, noting that “As a marketplace, we have been lucky when we most needed to be, but more importantly, the right people were in the right places and at the right times - at the banks, their regulators, in national capitals and in many of the EM governments and central banks. There have been inevitable surprises, few of which were entirely pleasant ones, but all of them were handled pretty well. The less pleasant surprises provided, shall we say, buying opportunities, and all in all, we have much to be thankful for.” The full text of his remarks can be accessed by Clicking Here
. Martin Schubert (European InterAmerican Finance Corp.) provided a brief introduction to the beginnings of the EM debt trading market with his iconic “there is just too much debt” and “life after debt” coined phrases, which can be accessed by Clicking Here
. A Special Video Message from Angel Gurria, former Finance Minister of Mexico and Secretary General of the Organisation for Economic Co-operation and Development (OECD), was played for the audience, which can be accessed by Clicking Here
Panel One Discussion – EM Origins and Birth
Martin Schubert (European InterAmerican Finance Corp.) moderated the panel, with the following speakers: Lee Buchheit (Cleary Gottlieb Steen & Hamilton), David C. Mulford (Vice Chairman International, Credit Suisse and Former U.S. Under Secretary of the Treasury for International Affairs and Ambassador to India), Hans-Joerg Rudloff (Chairman, Marcuard Holding Ltd and former Chairman, Barclays Capital and ICMA, and Chairman and CEO of Credit Suisse First Boston) and Rick Haller. Panel One Questions can be accessed by Clicking Here
In response to Schubert’s question, “What was the most vivid experience of the 1980s you faced following the Mexican payments stoppage, funny or otherwise?”, Mulford relayed a call from the Secretary of the Treasury relating to Saudi Arabia, imploring “you’ve helped create this mess in Latin America, come help us fix it”. Buchheit described his junior lawyer days with the Mexican team in Mexico City when, on a conference call with Bill Rhodes, Buchheit failed to adequately unmute his side of the conversation, thus contributing to the possible “collapse of the financial system due to his IT incompetence”. Rudloff recounts those years as a move away from the Social Democratic governments to leadership from Thatcher and Brady, who believed in globalization and privatization. This led to enormous hope; “one can’t underestimate the importance of these developments…a huge move from the 1970s…markets develop in particular environments, not out of the sky. The problems of the LDC debt crisis trained a generation of bankers and lawyers”. David [Mulford] moved the market forward, the Mexican restructuring was extremely well-done and disciplined; the 1990’s solution would not have occurred without that good resolution. Since Mexico was close geographically to the US, the US team led the effort. Haller recalled how the UK group had to scramble to get to the meetings in time, with the Concord half-filled with bankers drinking champagne and appreciating the absurdity while dealing with the bankruptcy of Mexico. While there were possible contagion effects globally, Rick’s firm, Morgan Grenfell, was also concerned with contagion within its building; but as EM grew, the firm appreciated the lessons that could be learned from EM.
In response to Schubert’s ”What was your greatest fear or the most difficult problem you encountered in dealing with the Mexican government debt restructuring or others from the 1980’s through the 1990’s, including the Brady Plan?”, Mulford was worried that the financial crisis would bring down the financial system. The Baker Plan hadn’t failed, it was not intended to solve the bigger problem. The LDC debt crisis presented such large problems that it could only be managed over time. The bank syndicates were kept together, with banks advancing new money to keep themselves current. The Baker Plan “ran out of gas” when banks reduced their willingness to continue to do so. The serious problem of divergence of interests and behaviors within the bank group developed, discipline broke down, it was harder to do restructurings, countries found it more difficult to comply with IMF conditions and arrears started to build. The architect of the Brady Plan (using collateralized Treasury debt, the risk spread out over the world) understood that, unless something drastic was proposed, the financial system would be “beyond hope”. The Brady Plan had to be implemented after the US elections at that time in order to be more palatable since it was difficult to advocate a reduction of Latin American debt without also reducing US citizens’ debt. The time was then ripe to “face reality square on and deal with the problem”. Poland was one of the success stories - with a 50% debt reduction, in three months’ time positive GDP growth was reported and has ever since.
Buchheit explained that the banking community of 500-600 banks acted in unison with extreme cohesiveness during the immediacy of the crisis. The tactical error that was made was to assume that this cohesiveness would continue, by requiring unanimous consent to amend material terms. As the decade rolled on, cohesion decreased, banks no longer found it sensible to lend new money and there was also fatigue on the debtor side (e.g., Argentina and Brazil), with the relentless accretion and debt that became unmanageable. The minority vetos became untenable and restructurings took longer to complete. Larger banks bought out some of the other banks. The Brady Plan was introduced in that atmosphere; the exchange offer was a direct product of the fact that it was “fatuous to believe that one could get unanimous consent in debt agreements”. As Bank Steering Committees (BACs), comprised exclusively of banks, gave way to diverse bondholders, it became increasingly difficult to restructure debt as new investors were willing to exit in the face of distress (while the banks of yesteryear were always willing to restructure), and distressed debt purchasers picked up the problematic debt. While banks did not mark-to-market their losses since it would destroy their balance sheets, they were more willing to restructure. On the other hand, writing off debt also allows restructurings to proceed.
Rudloff praised the earlier days of the remaining 80-90 banks (after the smaller banks were bought out since they could not carry the huge losses) taking collective responsibility to move forward, careful not to set bad precedents. Although big banks still have all the power today, that level of duty and responsibility is missing, he posited. An acute example is Greece, where the institutional framework in Europe has failed. If such collective responsibility is not taken, it will be imposed by law, with no choices, way out or equal treatment. In the guise of making the system better and more efficient, with less surprises, it will be “ruthlessly imposed on the market, and nation’s populations will suffer”. Haller cautioned that, once these laws are imposed, it will be a long time before countries can re-enter the capital markets. His biggest fear at that time was the time pressures would be imposed. “We wanted to deal with these problems, but not just yet. We needed time. Banks rebuilt assets and reserves and grew out of the crisis. We were afraid that we would run out of time.”
Mulford believes that paying a higher price to reach a solution was still worth the effort, while he views investors today buying at a deep discount and wanting 100% payment as unreasonable. Discounts in the past were negotiated between banks and countries, not traders, with banks buying collateral (which didn’t cost US taxpayers). Banks got better value on what they had left, and balance sheet problems were radically solved. He posited that Europe has a massive debt problem (even with high austerity) and high unemployment (structurally and youth-wise); unless European governments face debt reduction, “there is no way out, even if they don’t want to use US-led solutions. They will need to go back to the drawing board”.
Rudloff echoed Mulford’s remarks, “Europe can’t handle its debt problems, it’s hit a wall, it’s ridiculous to continue this way”. Greece and other countries need to restructure their debt, “otherwise it will open the door to outsiders not to pay their debt at all and democratically elected governments will be out of power. If we advise governments that debt cannot be reduced, there will be no democratic solutions, just panic. Radical elements will move in and take over”. “One can’t get a united Europe unless people face reality. As long as distortions of free markets remain, we won’t gain the right solutions. It’s up to us to make sacrifices when they can be done in an orderly way”. Haller’s view is that with QE so much debt is centralized on the books, so the solution is not “private investors must be reasonable”, but rather the public side should be reasonable and write off its debt. Mulford opined that the same message should be delivered to the US central bank. And, Buchheit concluded, “you can’t run a financial system forever if you insulate investors from bad investment decisions”.Panel Two Discussion – Our Market Grows and Develops
Martin Schubert (European InterAmerican Finance Corp.) moderated the panel, with the following speakers: William Ledward (Franklin Templeton Investments), Hans Humes (Greylock Capital Management), Carlos Penny-Bidegaray (Pennynvest) and Peter Bartlett. Panel Two Questions can be accessed by Clicking Here
In response to Schubert’s request to “share some funny stories coming out of your trading experiences over the years”, Humes recalled trying to obtain a 75% waiver from banks for a restructuring and being reprimanded by his superiors for not being sufficiently diplomatic; Ledward commented on how Lloyds Bank sat in 5 out of the 6 banker spots on a deal and how Franklin Templeton was the sole other spot; Penny recounted how at 3 am at Citibank headquarters, with all members of Republic of Argentina’s Steering Committee, while working with Bill Rhodes, he went to get expressos while successfully avoiding the press mounted at Park Avenue, outside of Citibank (Argentina was late in paying it’s Banco de la Nacion debt, FED was open all night, luckily it did pay later that next morning after a full vigil night); and Bartlett surmised (while recalling his meeting with the Central Bank) that the price of North Korean debt would be lower if they weren’t nuclear testing over Japan. Schubert told his story of how he advocated to read the Bank of Montreal loan agreement before signing it in his debt for basketball deal.
In response to Schubert’s question “what have you learned from your trades of Argentine, Venezuelan and Brazil debt or others that you would do differently today?”, Ledward cautioned against buying bonds issued through comfort letters signed by other companies; Humes recommended against making decisions on price alone (he waited until the second 2010 round of Argentina’s offer (thinking that the 2005 price wasn’t good enough and he underappreciated how Kirchner stuck to the Lock Law) and wished he had bought everything others hadn’t tendered); Penny suggested that memories of past events be kept fresh to avoid making mistakes (although history repeats itself because of the “grid-fear symptom” in all traders); and Bartlett recalls the “lemming-like mentality and feeding frenzy of banks at seasonal auctions”, which led to “crazy low point pricing everywhere”.
In response to “what are the biggest challenges facing Emerging Market debt trading going forward, including private and public sector debt, based upon your experiences of the 90’s?”, Humes thinks liquidity has deteriorated and there’s a weakness in the market, and predicts a potential crisis if many firms have to abandon the market; Penny is worried about the declining commodity prices (especially in Latin America), ongoing social conflicts between agriculture and mining and the application of never-ending political changes to the environmental laws, making almost impossible new large projects; Bartlett sees the market changing, migrating to screens and crowdfunding (to a certain extent), but when the market starts to become dysfunctional, liquidity will suffer; and Ledward commented on how some public sector creditors lending to China think they’re senior to private creditors and should get better restructuring benefits.
Commenting on Brazil, Humes thought Brazil with its “wall of debt” was the best opportunity for an EM investor (although better spreadsheets and “knowledge about the players and what’s going on on the ground” was crucial); Ledward hopes the Brazilian government would turn things around, including instituting a bankruptcy regime for Petrobras, which is currently not subject to any bankruptcy law; Penny thinks many Brazilian companies, such as EMBRAER, are “super cheap” and large construction companies’ related assets are an opportunity to look at; and Bartlett also sees “exciting opportunities”. Commenting on Peru, Penny hopes the change in the coming government and the free trade agreement signed with the US will aid in settling Agrarian Reform debt and US Dollar Gold denominated, so-called Guano, Bonds pending to be paid to bondholders.
Responding to “what will be the next great Emerging Market default?” Humes thought Venezuela (given his fear if the opposition takes over), with a quick move to the court process; Penny stated there would be many variables for LATAM depending on whether Trump or Clinton wins; Bartlett had significant concerns in Europe and the Mideast (specifically Saudi Arabia and UAE with their “Sharia-compliant minefield”); Ledward mentioned PDVSA (as a corporate, but with linkages to the sovereign, so it may be a rare example of how the corporate veil may be pierced), China loans being repaid by oil and warrants generally being included in future restructurings since many are presently out of the money.
On Cuba, Ledward noted that with OFAC sanctions most firms can’t invest yet and he would not be surprised if the sanctions were used a policy directive; Humes hoped that OFAC would communicate and integrate better if it intended to use sanctions as a weapon (since the Europeans were terrified of crossing OFAC); Penny mentioned the social and environmental responsibilities and political effects of the Panama papers; and Bartlett called Cuba the “last old school debt rescheduled with a mind-boggling large PDI trail”, an “amazing potential” with debt forgiveness likely to be small, a good window of opportunity to reach a London Club debt deal; a debt to GDP ratio that is manageable and tourism that will dwarf the rest of the Caribbean’s. And, while OFAC is unlikely to change its stance before the next election, there is a “huge opportunity to dismantle sanctions to bring standards of Western due diligence and regulations up to scratch (and same goes with Iran)”.Panel Three Discussion – Our Market Matures and Mainstreams – Today and Tomorrow
Yannis Manuelides (Allen & Overy) moderated the panel, with the following speakers: Lee Buchheit (Cleary Gottlieb Steen & Hamilton), Mark Franklin (Emso Asset Management Limited), Stuart Culverhouse (Exotix Partners LLP) and Dean Menegas (Spinnaker Capital Limited). Panel Three Questions can be accessed by Clicking Here
In response to Manuelides’ query on the next problem areas in EM, Franklin predicted Puerto Rico. Rates and currencies, not just debt, will be at the forefront, and US and European tail risk should be watched. He suggested looking through the lens of an EM asset by its technical, economic, legal and political aspects. And, he suggested that more pension funds and other large mangers should be more involved in EMTA’s projects.
Culverhouse viewed the EM asset class as more resilient and more correlated and integrated with other markets since it has grown, but productivity weakness, stagnation and potentially more corporate defaults must also be taken into account when viewing the “EM story”. He had a “growing concern” that, for policymakers and the official sector, reform of the international financial architecture and policy response was increasingly based on “lessons” from the two most atypical crisis episodes of all – Argentina and Greece. Official sector involvement needs to be monitored regularly, he stated. He also thought that the role of China and the bilaterals will be an issue going forward. And, investors should be more questioning and demanding on the use of proceeds.
In response to Manuelides’ query on EMTA contributions to EM over the years, Menegas suggested that how EMTA performed in the past is helpful to inform how it should operate in the future. “We can look backwards at our huge successes, and then look forwards to where EMTA can have similar impacts in the present and future. EMTA has had enormous influence in ensuring an orderly market in difficult-to-settle EM assets. Key to that has been the creation of market practices and standard forms of documentation (such as the 1995 Standard Terms for the Assignment of Loan Assets, lists of market practices for trading various assets, netting facilities and FX derivatives documentation)”. Without the settlement architecture of trading documentation, trading volumes would not have skyrocketed, and the Russian commercial unsyndicated loans of the mid-90’s could not have traded interchangeably. “Without EMTA’s creation of standard terms for assignments and for participations, and its bilateral and multilateral netting facilities, the process of trading and settling Vnesheconombank loans would have collapsed”. EM is a “state of mind”, and Greece, for example, converted to EM status as it took up the EM-type characteristics of other countries.
Menegas posited three additional areas in which EMTA’s skill set and expertise in building market infrastructure could be useful: (1) hard currency sovereign loans, which is a nascent market (since EMTA is used to dealing with messy sovereign loans general, is a useful intermediary and has contacts at OFAC), (2) local and frontier markets, which have not yet fully integrated with the global markets (work here would encompass standard documentation, monitoring of developments, interacting with legal counsel and local committees, market practices surrounding default and between domestic and international markets and providing guidance on new techniques (such as GDPs) and netting) and (3) bilateral amendments of FX and Argentine bond trading to facilitate smooth trading.
Buchheit discussed the official sector concern of whether the Argentine settlement will encourage litigious holdout behavior. In the last 10 years, there’s been a movement to supermajority control through contractual obligations, such as CACs, and an increased use of the trust structure, whereby enforcement is centralized through trustees (which are “slothful and cowardly at this point”, and will have to act more to protect the interests of the bondholders). The “central problem of sovereign debt is the pathological procrastination in admitting a problem and dealing with it”, trying to defer to the last possible moment. Politicians contribute to this by their “profound belief in the efficacy of prayer”, thinking that no country needs to listen to the IMF until a crisis occurs. And, the countries should also take prophylactic measures by seeking advice from the IMF and the sovereign’s creditors preventively, and adhere to the conditions imposed by the IMF before they benefit from its programs.
Buchheit also suggested that there should be a centralized place to find trust indentures for sovereign and corporate debt; “Argentina has taught us that names and coupons are not only what’s important – trading should not be blind”.