LONDON: Egypt could convert part of the $12bn of loans and grants pledged by Gulf nations this week into tradable bond securities, a lawyer working with the Egyptian government said. The lenders in question — Saudi Arabia, the UAE and Kuwait — will then have the flexibility to sell the bonds to other investors, should they wish to.
Qatar already has that option: Egypt recently converted $3.5bn of Qatari loans into bonds through a newly established $12bn Euro Medium-Term Note programme. The loans made by the other three Gulf nations might be given similar treatment.
“The contributions from non-Qatar states are certainly capable of being represented by notes issued through the programme,” said James Healy, a partner at law firm Skadden, which represented Egypt in connection with the establishment of the programme.
According to the programme’s prospectus, however, funds raised in the form of notes must be used to finance the country’s budget deficit, something that may be less attractive for Egypt compared with the alternative of keeping the money on deposit in the central bank.
“Notes issued through the programme have been authorised under the budget law and have to be used to reduce the budget deficit,” said Healy. “Egypt may have more flexibility if they leave the funds as deposits with the central bank, as these can be used to increase foreign reserves.”
While turning foreign loans into bonds reduces Egypt’s flexibility, the conversion brings clear advantages for the lenders, providing them with tradable securities and formalising the terms of the loans under English law.
“The key advantage is the potential tradability of these securities, which would suggest Qatar might have considered trading them before maturity,” said Healy.
Earlier this month, Egypt converted $1bn of Qatari loans into bonds under the programme, which is led by HSBC and QNB Capital. The new $1bn three-year bonds were issued on July 1 at par to yield 3.5 percent. The transaction follows a $2.7bn 18-month senior unsecured deal that was issued in late May at a yield of 4.25 percent. The conversion has another advantage for Qatar, as bonds provide extra protection in the event of Egypt defaulting.
The EMTN programme documentation sets out that all bonds are subject to English law, and that creditors would have recourse to international arbitration courts in London. While this doesn’t confer complete protection the mechanism is useful when dealing with international aid, an analyst said.
Since 2011, Qatar has made deposits of $8bn in total to Egypt. Of this, about $5.5bn is expected to be converted into bonds, a source said, suggesting that a further $2bn could follow when the political situation in Egypt stabilised. The Saudi funds comprise a $2bn central bank deposit, $2bn in energy products and $1bn in cash; Kuwait will divide aid into a $2bn central bank deposit, a $1bn grant and $1bn in oil reserves; and the UAE will make a $1bn grant and will offer a $2bn loan, the three respective state news agencies reported last week.
Reuters
