Iraq plans to settle Saddam-era debt through cash buyback and debt swap

By Reshmi Basu

New York, July 26 - The Republic of Iraq said it plans to settle its outstanding Saddam-era commercial claims through a cash buyback and through a debt swap, according to a news statement. Claimants' eligibility for the cash payment or exchange will depend on the amount that is owed to them by Iraq and Iraqi public sector obligors.

The finance ministry estimated that the amount of Saddam-era claims held against Iraq by both commercial and bilateral creditors is more than $125 billion. Of that amount, commercial creditors are estimated to be owed $20 billion.

Iraq said it expects to make a cash buyback offer, depending on the availability of funds. A claimant currently registered with Ernst & Young will be eligible to receive the cash buyback offer if the total amount of its outstanding registered claims as of Aug. 6, 1990 is $35 million or less or its equivalent in other currencies.

Claimants with total registered claims above that threshold will be eligible to receive the debt-for-debt exchange offer only.

The country estimates that more than 85% of its non-governmental creditors holding claims will be eligible to receive the cash buyback offer.

The cash purchase price for the cash buyback will equal 10¼% of the reconciled outstanding amount of those claims, including principal and accrued interest, as calculated by the reconciliation methodology. The methodology is posted on Iraq's debt reconciliation web site.

Furthermore, Iraq's cash buyback offer is expected to take the form of an invitation to tender claim.

In return for the cash payment, participants will agree to forgive the debt owed.

The transaction is expected to occur periodically during 2005 and early 2006.

Above $35 million

For those who hold claims above $35 million, Iraq expects to make an offer to exchange the old debt for two new debt instruments: a syndicated loan or a privately placed bond.

Iraq will be the obligor under both instruments. The claimant will elect the instrument of choice.

Iraq currently anticipates making this debt-for-debt exchange offer in the fourth quarter of this year, following the signing of a standby arrangement with the International Monetary Fund.

The syndicated loan will have financial terms that closely replicate the financial terms of Iraq's Nov. 21, 2004 agreement with its Paris Club creditors.

The loan will come due on January 2028, with a principal grace period lasting until July 2011. Principal amortizations of the new loan will start, in equal semi-annual installments, in July 2011.

Interest accruing through the end of 2007 will be fully capitalized, and interest accruing during 2008, 2009 and 2010 following the third installment of debt cancellation will be partially capitalized on a declining basis.

The loan will either be denominated in dollars, Japanese yen or euros. Interest will accrue at a spread of 50 basis points over the applicable Libor equivalent base rate.

The finance ministry said the privately placed bond will also have a maturity of January 2028 but will be exchanged at a 20% exchange ratio.

Principal amortizations of the new bond will commence, in equal semi-annual installments, in July 2020.

The coupon will be set at Libor plus 50 basis points or at an equivalent fixed rate, chosen by Iraqi election.

The bond will be denominated only in dollars and will be eligible for clearing through Euroclear and Clearstream, Luxembourg.

"Based on current market conditions, both the syndicated loan and the privately placed bond will have a net present value comparable to the Paris Club financial terms and to the level of the cash buyback price," the finance ministry said in a statement published on its web site.

Iraq also announced that the claims registration process would be reopened to allow claimants to register with Ernst & Young. This reopening period will expire at the close of business in London on Aug. 8.

Eligible claims are outstanding contractual claims against certain Iraqi obligors and guarantors that arose prior to Aug. 6, 1990.

Eligible claims include claims against Rafidain Bank and Rasheed Bank.

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