Panama Retires Brady Bonds

by Mike Godfrey, Tax-News.com, Washington

20 July 2006

Continuing the restructuring of its sovereign debt, Panama exercised a call option on 17th July over its remaining US$351m of Brady bonds, using a bank loan to raise most of the cash.

The government has been carrying out a program to reduce its debt service costs, and the Bradys (named after US Treasury Secretary James Brady, who played a major role in resolving a Latin American debt crisis) are more expensive than current loans availalable to Panama.

"The prepayment of the remaining Brady bonds represents a historical milestone with multiple benefits for the country, as it will allow Panama to cancel all restructured debt and erase any remaining trace of the country's past experience with insolvency," the government said.

In January, Panama offered 230 basis points above comparable US treasuries on a new 30-year global bond which matures in 2036 and which was offered in exchange for up to $2.8 billion of its shorter-dated global debt.

Panama says it wants to extend its debt maturity profile and reduce its short-term debt burden by swapping existing earlier-maturing debt into longer-dated debt. The new bond has a collective action clause allowing Panama to amend its terms with the consent of not less 75% of the holders of outstanding bonds.

Last November, Panama offered a new US$980m 20-year benchmark sovereign bond, in exchange for four of its global bonds, maturing in 2008, 2011, 2012 and 2020. That new paper matures in 2026.

In October, 2005, Panama filed with the US Securities and Exchange Commission (SEC) to issue up to $2 billion worth of debt. Panama said it planned to issue the securities to raise money for general refinancing and other spending needs. The ‘shelf registration’ allows Panama to sell securities in one or more offerings, determining details such as size and price at the time of sale.

Fiscal austerity measures agreed last year are being implemented by the government, with the IMF's strong approval, and are expected to dent the economy this year. The package seeks to raise revenues from new business taxes, in a bid to reduce the country’s level of debt. The legislature voted 46 to 28 in favour of the measures, which include a new 1.4% tax on companies’ gross revenues, and a levy on firms operating in the Colon Free Trade Zone – the largest free port in the Americas.

Finance Minister Ricaurte Vasquez said that the fiscal reform package will "stabilize Panama's public finances and establish conditions for the economic and social growth of the country”.

President Martin Torrijos hopes that the new measures will reduce Panama’s $700 million budget deficit, equal to 5.2% of GDP in 2004. He is also hopeful that the extra revenues will help the government to reduce its sovereign debt and restore the confidence of international institutional investors.

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