Academic journal article Law and Policy in International Business

A Practitioner's Guide to Debt for Equity Swaps: The Argentine Model

Academic journal article Law and Policy in International Business

A Practitioner's Guide to Debt for Equity Swaps: The Argentine Model

Article excerpt


In October 1990 the New York Times reported that Argentina owed foreign lenders $67 billion.(1) This debt makes real growth in the Argentine economy virtually impossible. In 1988, interest payments alone on the outstanding debt reached $2.8 billion.(2) In order to facilitate a sustained expansion of its economy, Argentina must somehow escape the burden created by its massive national debt.

One technique that debtor countries like Argentina are experimenting with to reduce their national debt burdens is the debt for equity swap.(3) Swaps are particularly popular in Latin America,(4) where debt has historically been a great impediment to development.(5) This Note begins with an examination of the mechanics of debt for equity swaps. Next, it analyses some domestic legal issues surrounding debt for equity swaps and, in an attempt to provide insight into the functioning of foreign legal debt for equity regimes, it considers the Argentine model. Finally, the Note reviews the advantages and disadvantages of debt for equity swaps from creditor, investor, and debtor perspectives-- again specifically focusing on the Argentine model.


Debt for equity swaps may be one step, two step, and three step transactions. One step debt for equity swaps are one for one swaps in which debt is exchanged for equity. Creditor company A converts the debt that is owed to it by debtor company B into an equity interest in company B.(6) In effect the swap permits the debtor to pay off all, or part, of its debt to the creditor with an equity interest in itself.

Two step swaps involve two step transactions, and are more useful to indebted nations than are one step swaps.(7) In the two step swap, a creditor bank that is holding the public debt of Argentina, for example, sells that debt to the Argentine National Bank, often at a discount. In Argentina, the creditor will receive, in return, australes(8) that it uses in the second step to purchase shares of a private or state-owned company. In other countries, creditors receive other national currencies. Debtor countries like Argentina benefit from the transaction by eliminating a portion of their debt without dipping into their foreign reserves and by simultaneously stimulating private investment in their country. The creditor bank gains from this swap by receiving payment on what was otherwise an unrecoverable debt. In one swap of this type, Bankers Trust received a forty percent interest in Chile's largest pension fund and a ninety-six percent interest in its largest life insurance company.(9)

While two step swaps are very helpful for many creditors, however, their utility to U.S. banks is limited.(10) U.S. banking laws restrict the amount of equity interest U.S. banks may hold in non-banking enterprises. Furthermore, both one and two step swaps are of limited utility to debtor nations as they tie debt relief to a creditor's interest in obtaining equity in the debtor nation.(11) Unless a creditor is willing to accept an equity interest in the place of a more traditional cash repayment, the one and two step swaps will be useless to the debtor nation and to the creditor.

For creditors and debtor nations like Argentina, three step swaps are the most useful. Indeed, today the typical debt for equity swap is a three step transaction.(12) With the three step swap, the problem of a creditor not wishing to obtain an equity interest in the debtor is circumvented. As the first step in this sort of swap, the creditor bank sells, for example, Argentine debt at a discount in the secondary market.(13) Next, an investor, often a multinational company operating in Argentina, buys the discounted debt and presents it to the Argentine Central Bank for redemption at, or slightly below, face value in australes.(14) This investor, unlike the creditor in the one step and two step examples, has a genuine interest in acquiring a portion of an Argentine company. …

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