Senegal Total Return Swaps Restructuring: December Deal Targeted

• Senegal aims to reach an agreement in principle with its public and private creditors by December.
• The West African nation is seeking debt treatment under the G20 Common Framework.
• A key and novel aspect of the restructuring involves requesting contributions from holders of 1.72 billion USD in total return swaps.
• These derivatives, backed by FCFA-denominated government bonds, have rarely been addressed in sovereign debt restructurings.
• Senegal plans to conduct parallel negotiations with public and private creditors, a departure from previous G20 Common Framework cases.

This initiative marks a significant development in sovereign debt restructuring, particularly due to the unprecedented inclusion of total return swaps, which have almost no prior history of being addressed in such frameworks.

Senegal is targeting an agreement in principle with its public creditors and bondholders by December, according to sources cited by Reuters. This ambitious timeline was presented during Dakar's initial engagement with investors regarding its restructuring proposals. The West African nation had previously announced its intention to seek a "treatment" for its debt under the G20 Common Framework, a mechanism designed to facilitate orderly sovereign debt restructurings for low-income countries.

This comprehensive approach underscores Senegal's commitment to addressing its financial obligations through a structured and internationally supported process. The December target highlights a desire for a swift resolution, setting a tight schedule for complex negotiations involving various creditor groups.

A particularly noteworthy and novel element of Senegal's plan is the proposed inclusion of total return swaps (TRS) in the restructuring. The government intends to solicit a "constructive contribution" from the holders of these derivatives, which represent an outstanding value of 1,000 billion FCFA, equivalent to approximately 1.72 billion US dollars. These specific financial instruments are backed by government bonds denominated in FCFA.

The treatment of total return swaps in a sovereign debt restructuring context is highly unusual, with virtually no precedent in previous cases. According to a government presentation cited by sources, three key counterparties have been identified: First Abu Dhabi Bank, Africa Finance Corporation, and Société Générale. When contacted for comment, First Abu Dhabi Bank stated it does not discuss its "individual client relationships," while Africa Finance Corporation, Société Générale, and the Ministry of Finance did not provide an immediate response.

Senegal's strategy under the "strengthened" G20 Common Framework involves a significant procedural departure from earlier restructurings. The government plans to conduct parallel discussions with both its private sector creditors and public creditors, while also establishing mechanisms for information sharing among all parties involved. This contrasts sharply with the sequential negotiation processes observed in countries like Ghana and Zambia, where discussions were held one after another.

The previous approach in those nations contributed to restructurings that ultimately took longer than initially anticipated. By pursuing simultaneous negotiations, Senegal aims to streamline the process and potentially accelerate the path to a resolution, setting a potential new benchmark for how complex sovereign debt restructurings, especially those involving novel financial instruments like total return swaps, are managed under the G20 framework in Africa. This development warrants close attention from legal professionals and investors monitoring African sovereign debt markets, as it could establish an important African derivatives restructuring precedent.

This development sets a potential precedent for the treatment of complex financial derivatives like total return swaps in sovereign debt restructurings under the G20 Common Framework. Lawyers advising financial institutions, bondholders, or investors in African sovereign debt should closely monitor the negotiations and the eventual agreement to understand the implications for future debt treatments and derivative valuations, particularly given the novel inclusion of these instruments.

Source: Original reporting via Reuters