Foreign guarantors helping plug emerging funding gap

With re-financing becoming a giant headache for sovereign debtors across the globe, some struggling emerging economies are securing guarantees from richer nations or multilateral development banks to bolster their chances of selling bonds to wary investors.The guarantee provides the emerging country borrower with access to otherwise-closed international capital markets, while the guarantor is extending financial support to a friendly trading partner at relatively low cost.It’s already being used in one Arab Spring country — Tunisia — and analysts say it could extend to others in the region, like Egypt.Tunisia, which suffered several ratings downgrades in the past year following its Arab Spring uprising, last week said it was planning a US-guaranteed dollar bond in the next few months.And the tiny indebted nation of St Kitts & Nevis last week completed a debt exchange with new debt carrying a small guarantee from the Caribbean Development Bank.The guarantees are particularly helpful in countries in the Middle East that have been through political and financial turmoil in the past year.Setting a precedent for this type of guarantee, the US underwrote a borrowing programme for Israel 10 years ago to help the country out of economic difficulties.“Over the medium term, we are going to see a series of funding gaps in the Middle East region — the guaranteeing of sovereign debt is going to be one way of resolving this,” said Florence Eid, chief executive of research and advisory firm Arabia Monitor.“It’s a very good idea for countries in the region to get guarantees on their debt, from international economies like the US that can afford it.”Tunisia’s finance ministry said last week the country could issue a US-guaranteed bond totalling $400-500mn, its first international bond since 2007.Plans for a conventional Eurobond last year were put on hold after the ousting of President Zine al-Abidine Ben Ali in the Arab Spring movement.Tunisia’s still boasts an investment grade rating, helped by a relatively contained budget deficit.But at the lowest possible investment grade rating with negative outlook from all three major ratings agencies, the country is at risk of tipping into junk territory.The guarantee, from the AAA/AA+ rated US, is likely to boost the rating of the bond, investors say.“Clearly, having debt issued with the sovereign risk of the US is superior to having it issued with the sovereign risk of a country that has just undergone a revolution,” said Daniel Broby, chief investment officer of fund manager Silk Invest.“The guarantee will allow the issue to be priced more tightly.”A precedent was set in 2002 when Israel received a package of US loan guarantees to help the economy deal with a recession caused by a global downturn and wave of Palestinian bombings.Israel has issued $4.1bn under the programme and still has billions left to use. But it hasn’t issued anything under the programme for a number of years, since its own credit ratings have risen.Investors speculate that countries such as Egypt, which has gone back to the drawing board to negotiate a loan from the International Monetary Fund, may follow suit in getting a US guarantee on their debt.“If Tunisia gets it, I suspect others will ask — Greece could do with such a guarantee right now as well,” said Broby.Greece successfully completed a debt exchange earlier this month after months of market anguish, but its new debt continues to trade at very weak levels.The beauty for the guarantor is that a little money can go a long way.The US State Department announced last month that it was making $30mn available for loan and bond guarantees to Tunisia.Such a sum can go much further, analysts say, as the guarantee only needs to represent the probability of default.So if investors place a 5% probability of Tunisia going into default, the country can easily borrow $600mn with only a $30mn guarantee.In the case of St Kitt’s, a small $12mn guarantee from the Caribbean Development Bank will ensure the country can pay interest payments on its debt, according to David Nagoski, director at White Oak Advisory, advisers on the deal.“Creditors can take comfort from the fact that a multilateral institution other than the IMF has reviewed the overall programme and feels sufficiently confident about future debt sustainability to provide support through a guarantee,” Nagoski said.The African Development Bank provided a similar guarantee when Seychelles restructured its debt in 2010.The World Bank has also guaranteed emerging debt in the past, most notably Argentina.Argentina defaulted on a World Bank-guaranteed $250mn bond in 2002 and has not yet been able to re-enter international capital markets, but investors in that bond were able to recoup their money via the guarantor.But the danger for borrowers is that investors no longer trust their credit without the crutch of the high-grade guarantee. Too large a guarantee can reduce investor confidence in a borrower’s ability to issue alone in future, analysts say.Meanwhile, the danger for the guarantors is that they are increasingly forced to open their wallets, once such a precedent has been set.