Cote d’Ivoire defaults on $2.3bn Eurobonds

Cote d’Ivoire has formally reneged on $2.3 billion of Eurobonds, becoming the first nation to default since Jamaica in January 2010. The default comes after the strife-torn West African nation could not pay $29 million of interest which had become due on 31 December, and after a 30-day grace period had expired. However, the market appears to have faith the crisis will eventually end.
The problem stems from a stand-off following an election which all international and African observers say was won by Alassane Ouattara. However, the previous president Laurent Gbagbo has refused to step down and got an internal ruling to disallow hundreds of thousands of votes, meanwhile using the military to blockage Ouattara in a hotel where he is protected by 700 UN peacekeepers.
African states had earlier threatened force to remove Gbagbo, but more recently seem to be settling onto the usual compromise of a shared administration as demonstrated in Zimbabwe and Kenya. This is what Gbagbo seems to have been gambling on from the start, according to his early statements. Meanwhile Cote d’Ivoire hangs on the brink of renewed civil war, hundreds have died and thousands have fled into neighbouring countries.
According to a report on Bloomberg, Alcide Djedje, foreign affairs “minister” in Gbagbo’s administration, said in Addis Ababa, at the African Union summit: “We will be making the payment. We do have the money of course. We have been paying civil servants. I don’t have a date yet but we will definitely pay.”
Bloomberg cites an email from Thierry Desjardins, the Paris-based chairman of the London Club group of commercial bank creditors and vice-president of sovereign debt restructuring at BNP Paribas SA, which said they had not received the debt and this was an “event of default”. The trustee for the bond is Robert Rywkin, the New-York based trustee at Law Debenture Trust Co., and Bloomberg says he said his firm would send out a notice of an event of default “not more than a couple of days later,” once it has assessed the situation.

Surprising price bounce

Meanwhile the bonds price bounced back up. They were 36.25 cents for each $1 of nominal value in trading on Monday (31 January) but up to 40 cents by 4pm today (Tue 1 Feb), according to bid prices quoted on Bloomberg. This may be because the bonds will now trade including any interest that has been accumulated which the buyer can claim, according to Stephen Monks of London stockbroker Exotix Ltd. Bloomberg quotes Aviva Werner, general counsel at the New York Emerging Markets Traders Association said the bonds should, unless otherwise agreed, trade “flat”, which means the buyer doesn’t pay for accrued interest separately from the purchase price of the bonds: “It takes into account they might pay in the next week, month, year, so it’s an all-in price; the buyer is due to all past interest.”

Central bank closed

The region’s central bank, also known by its French acronym BCEAO, said it shut its offices on 27 January in the Cote d’Ivoire’s commercial capital, Abidjan. The Finacne Ministers of the West African Economic and Monetary Union had ordered it not to give Gbagbo access to national funds.
If the situation eases and a new government have access, then Cote d’Ivoire, which exports a third of the world’s cocoa, has sufficient reserves there to pay the interest. Most investors believe there will be funds to repay the bond.
Felix Domaus, of Erste Sparinvest KAG in Vienna which holds the debt in its portfolio fo developing market assets, is reported by Bloomberg: “This coupon is a small payment, it shouldn’t be any trouble to Ivory Coast’s cash flow in a normal situation. Investors will give Ivory Coast the benefit of the doubt, professional Ivory Coast investors are used to the necessity of being patient with this country.” However, he warned that patience could run out: “There will be some point in time when we investors will do something, accelerate payment or whatever.”
Standard Bank Plc in London noted “After some further downside, we believe Côte d’Ivoire 32s will be the best-performing sovereign Eurobond in 2011,” in its African Markets Revealed report on 17 Jan.

Origins of the debt

In 2000, Cote d’Ivoire reneged on $3.5 billion of “Brady bonds”, which were fixed income securities created as part of a debt restructuring plan for developing countries and named after former U.S. Treasury Secretary Nicholas Brady. It issued Eurobonds last April as part of its debt restructuring at a yield of 10.181%, according to Desjardins and data compiled by Bloomberg.

Cocoa Prices

The European Cocoa Association and Federation of Cocoa Commerce Ltd. said there is a “significant slowdown” in flows from the country. World cocoa prices have hit one-year highs.
The previous sovereign debt default was in January 2010 when Jamaica defaulted on its domestic bonds, citing falling tourism and remittances because of the global recession.

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