Newsroom: Article

Emerging Market De(bt)velopments

Russia has reportedly agreed with North Korea to write off 80% of the debt it is owed by North Korea and has started discussions on payment of the remainder. They furthermore are reported to have agreed on estimating North Korea’s debt to Russia at $8bn, prior to the write off. North Korea owed an estimated 3.8bn (principle only) transferable roubles to Russia, dating from the period between 1960 and 1980. There is considerable uncertainty on what the exchange rate of the transferable rouble to the US dollar should be. Russia generally maintains that it is 0.58, but the latest former soviet state debt restructurings reportedly assumed rates between one and five roubles.

In any scenario, the $8bn implies a portion for past due interest. The relevance of these Russian-North Korean restructuring terms lies in the fact that North Korea implicitly accepted a restructuring on principal and past due interest, which may act as a benchmark for a future restructuring of North Korea’s commercial debt outstanding.

London Club debt outstanding is approximately $700m in principal, whereas past due interest has increased this amount to between $2.5bn and $3bn. We roughly estimate that there is at least an additional $150m of trade debt outstanding. Prices of the commercial debt fluctuate around 20% of principal only. Under the Russian restructuring terms and with the current 300% PDI levels, the value of the commercial debt would be in the range of 80% of principle, assuming immediate repayment of debt not written off (ie, 20%). However, taking an additional 50% discount for the likely favourable terms on this remaining 20%, the value of the commercial debt would be around 40% of principle at the time of restructuring. Requiring a 25% year-on-year return, the North Korean commercial debt restructuring should be concluded on Russian terms within the next three to four years to justify the current market prices for North Korean debt.

Prices are a percentage of principal only, however assuming inclusion of an average amount of PDI for the specific debt instrument and the specific debtor. Trade debts and their documentation differ from case to case and price ranges should therefore be considered as benchmark only.

Price ranges are based on a monthly compilation of sources and analytics. Liquidity on most instruments is very limited and trading may not have taken place for some time.

For brokerage requests or more information on specific debts, debt conversions and restructurings, please contact:
- Raymond van Hulst on vanhulst@omnibridgeway.com
- Heleen Rijkens on rijkens@omnibridgeway.com