Sovereign Debt Restructurings May Add ESG Policy to the Mix

(Bloomberg) --

Getting environmental criteria added to Ecuador’s debt-deal last month was always a long shot, but the very fact it was proposed suggests future restructurings may come with a new twist.

Amundi Asset Management’s idea to link the Ecuador deal to the removal of fuel subsidies was brushed aside by the government and other bondholders; there simply wasn’t time to impose complicated new criteria. Future deals may get a different response.

“We now have a lot more awareness from investors and we have a better chance of introducing those elements in future restructurings,” said Yerlan Syzdykov, London-based head of global emerging markets at Amundi, Europe’s biggest money manager with about $2 trillion in assets.

After Argentina and Ecuador, the next potential candidates for restructuring are Lebanon, which has defaulted on $30 billion in international debt, and Zambia, which has $11 billion in external debt. It’s not immediately clear what environmental criteria could be added, and Syzdykov declined to discuss specific cases until restructuring proposals have been presented.

In its talks with Ecuador, Amundi wanted the government to eliminate the fuel subsidies that cost about $1.4 billion per year and encouraged the use of gasoline. Other bondholders and the government said the inclusion of environment, social and governance standards would have held up the $17.4 billion debt restructuring at a moment when the country had little time to lose.

ESG Goals

President Lenin Moreno’s government had tried to remove the fuel subsidies last year, but was forced to backtrack after protests led by Indigenous leaders as well as student and labor unions.

“Ecuador was always willing and interested, but making a bond with ESG goals isn’t easy,” Finance Minister Richard Martinez said in an interview. “Ecuador is very interested in carrying out these transactions, but wants to do it with enough time and setting the right goals and the right incentives.”

Inclusion of ESG criteria was also discussed among bondholders during Argentina’s restructuring, but it was dropped because of concern about imposing additional financial penalties, said Graham Stock, senior sovereign strategist for EM at Bluebay Asset Management.

Time Is Right

“We will likely see many more defaults and restructurings in EM over the coming one to two years, so the time is right to make a push in this direction,” said Bryan Carter, head of global emerging markets debt at HSBC Global Asset Management, calling on more money managers to join the cause.

Zsolt Papp, emerging market debt investment specialist at J.P. Morgan Asset Management in London, also called for “a more holistic” approach to debt deals.

For future debt restructurings, Amundi proposes a mechanism where the coupon on the bonds would vary depending on compliance with the sustainability commitments.

Independent oversight would be crucial. Syzdykov said this could include third-party inspections and an agreement among creditors, the International Monetary Fund and the World Bank that prevents a borrowing country from playing one off against another.

“It was a small window of opportunity for us” in Ecuador, Syzdykov said. “But we probably underestimated the complexity of this process with so many different counterparties involved.”

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