Stay informed with free updates
Simply sign up to the Capital markets myFT Digest — delivered directly to your inbox.
Sovereign debt restructuring daddy Lee Buchheit once told FT Alphaville that the “pathological procrastination” of financially stricken countries that should simply accept the inevitable and default was a “testament to the belief in the efficacy of prayer”.
That observation came to mind when we saw El Salvador’s bond sale last week. From Bloomberg:
El Salvador returned to global debt markets with an offering that will pay investors a higher interest rate if the government fails to win credit upgrades or a deal with the International Monetary Fund.
The Central American nation priced $1 billion in debt due in 2030 at 89.923 cents on the dollar to yield 12%, according to people familiar with the matter. The coupon is 9.25%, they said, and the note amortizes starting in 2028.
The deal includes an additional interest-only security tied to nation’s credit score or an IMF deal. If El Salvador fails to get at least two upgrades to a rating of B, which is five steps below investment grade, or strike a deal for a loan package with the IMF by October 2025, those coupon payments will jump to 4% from 0.25%, said the people, who asked not to be identified because they’re not authorized to speak about it.
As Clemens von Luckner observed on X, this is simply an “absurd transaction”, a fairly desperate gamble for financial redemption that even Fitch gave a CCC+ grade. Fitting, because this is the sovereign equivalent of a payday loan.
Let’s set aside the warrants for now. The amortising structure means that in return for $899.23mn now, El Salvador is committing to pay creditors $92.5mn annually in interest, and then $333.3mn in principal each year in 2028-2030.
The accompanying warrants add another $2.5mn in annual interest costs, but if El Salvador doesn’t get several credit rating upgrades or secure an IMF programme by October 2025 the cost of the warrants jumps to $40mn annually.
So — if we’ve got the details correctly and done the maths right — annual interest payments of $132.5mn on ca $900mn of debt, for a country already in financial stress. And that’s even before the punishing amortisation payments kick in.
The proceeds are supposed to be ploughed into buying back some of the $1.75bn of bonds due in 2025, 2027 and 2029. Which might make sense if they didn’t carry lower coupon payments than El Salvador’s latest bond issue. Basically, El Salvador is swapping expensive debt for extortionately expensive debt, rather than accepting the IMF’s strings-attached but cheap money, and hoping for divine intervention before October 2025.
Over at GlobalCapital, Oliver West is also suitably 👀👀👀👀👀:
Latin American governments love to innovate to get out of tricky debt situations, and — to some extent — it worked. El Salvador raised $1bn, after all.
But, at 12% plus whatever the warrant ends up costing, this is not innovation that should be applauded.
This structural feature, rather than proving the country’s commitment to debt sustainability, was little more than financial engineering. It allows El Salvador to kick the can down the road on the real issues it does not want to tackle, by raising cash to deal with its immediate needs.
The wheeze was necessary in part because the country’s fiscal performance, after initially improving under Bukele, had been slipping ahead of the election in February this year, which he won with 85% of the vote.
The government also needed the bond because the best way to tackle El Salvador’s acute financing challenges — an IMF programme that would unlock plenty of other cheaper funding and send its bond yields tumbling — is in fact not on the cards for a while yet, even if this bond was designed to signal the opposite.
El Salvador claims to desire an IMF programme but has been talking about one for at least three years, with very little action. The IMF and the government do not see eye-to-eye.
Eye to eye is an understatement. Perhaps the IMF-linked warrants were included to send a signal to markets that El Salvador remains committed to securing a Fund programme. But when asked about the recent bond sale last week, IMF western hemisphere head Rodrigo Valdes would only say “we were not consulted and we haven’t endorsed that operation”.
Von Luckner speculates that it is an attempt at forcing the IMF into giving El Salvador a deal, because without one a sovereign default looks pretty assured. Meanwhile, West wonders if El Salvador’s president Nayib Bukele is gambling on Donald Trump winning the US presidential election and forcing the IMF into giving the country a loose-strings programme.
Both theories seem possible, but pretty dumb if that really is Bukele’s rationale. It’s hard to see why the IMF would care much about El Salvador defaulting, even if Bukele tries to blame the fund for the fallout. Investors collecting those kinds of yields can’t complain it wasn’t a major danger either. And Trump 2.0 will probably have more immediate priorities than arm-twisting the IMF into a giveaway programme to a country he’d struggle to place on a map.
The simplest explanation is probably the best one here. Bukele has defied naysayers before so he is simply rolling the dice once more. In this he is no outlier, merely the latest head of government who believes they can “gamble for redemption”.
And there are enough investors out there who are willing to bet that they can collect enough coupons (and get a sweet enough deal in any restructuring) that it still made sense to buy the bond. Payday lending can be a good business after all.
