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Introduction
Since the onset of the debt crisis, various mechanisms of debt conversions have evolved to reduce the stock and servicing cost of debt owed to transnational banks by developing countries. Debtequity swaps or debt-equity conversions are one of those mechanisms. It is a process by which a debt instrument of a debtor country is converted into an equity investment in that country. This involves several steps. Typically, an investor wishing to invest in a debtor country through debt-equity swaps presents an investment proposal to the competent authorities. On approval, the investor purchases the foreign debt ofthat country, generally owed to a transnational bank, at a price less than face value from the secondary market. The debt paper is then presented for redemption to the debtor country's central bank, which provides local currency equivalent to somewhere between the face value and the secondary market value of the paper. The investor then uses the local currency to make the approved investment. Within this overall framework, the content of individual country programmes may differ significantly. Debt-equity swaps have been implemented in many countries in one form or another. Among these are countries as diverse as Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Jamaica, Mexico, Nigeria the Philippines and Yugoslavia.2
Basics of Debt Equity Conversions
A useful taxonomy with which to start is that employed by Roberts and Remolona in their study for the Group of 304. They distinguish among three basic types of swaps that are often subsumed within the broader category of debt conversion:
* Debt-debt swap is defined simply as "a change of creators holding developing country loans". This has alternatively been defined as a "risk swap" arising from an institution's changing assessment of the relative value of its assets. It is really nothing more than a rebalancing of creditors' book. As such although it continues to constitute most of the business for banks and brokers in the secondary debt market, it is outside the scope of this guide except (and it is an important exception) in so far as it can facilitate debt equity conversions as defined below.
* Debt-equity swap according to Roberts and Remolona, is "a deal converting a developing country's debt into foreign equity in a domestic firm". In this definition,...