Pakistan may struggle to restructure dollar bonds: Report

According to a report from FinancialTimes, there could be a big problem in the option to restructure one of Pakistan’s near-maturity dollar bonds, and the culprit is the issuing authority of that bond itself. The report states that in order to restructure any foreign currency bond, a onerous or extraordinary resolution must be passed by the issuer. This resolution requires a vote of the bondholders, after which, if a certain threshold of voters is reached, the resolution is adopted.

The report indicates that as of 2003, this threshold was maintained at 75%. In fact, for most bonds issued in 2014, when this particular bond was issued, this threshold was maintained at 66% or lower, which reduces the risk of default in the event of a lock-up. Since there was no penalty for maintaining this lower threshold, countries and entities maintained this low threshold to save their future interests. The Pakistani issuing authorities, on the other hand, showed complete misunderstanding of the market, keeping the requirement to pass an onerous resolution at 90%.

And that’s not all that’s wrong with this link. The report goes on to explain how there is another snag in the definition of voters. It defines an extraordinary resolution as “a resolution duly passed by at least 90% of the votes cast”. as opposed to “threshold in proportion to the aggregate principal amount”. This means that someone with as little as $1,000 bail can affect the restructuring process as much as someone with $100 million.

Pakistan, which has faced the worst forms of flooding over the past year, needs more than its $7.4 billion debt repayments in reserve to keep the country afloat . To that end, Pakistan may have to restructure most of its debt in the current year and possibly next year. The report suggests that due to these devastating floods, Pakistan may also need to restructure its sovereign debts. Even though Pakistan’s sovereign or commercial debt (mostly foreign currency bonds) represents less than 16% of Pakistan’s total debt, the likelihood of a country declaring sovereign default is highest for this particular form of debt.

The report goes on to reveal that another of Pakistan’s dollar bonds, namely the 2036 dollar bond, amounting to $300 million, also has the same 90% voting threshold requirement. . Although, because the agency agreement for this last obligation is not available, it certainly cannot be argued that it also has the individual “cast votes” clause or not.

Most Pakistani dollar bonds trade at less than 60% of face value. A bond of this nature available at such a discount, which amounts to a billion dollars, according to FT, will not be difficult for a circumspect group to hoard enough of it, so that it can block the vote of restructuring. So, when the time comes, this very bond can open the doors for a heist for Pakistan and no one can be blamed except the issuer itself.