House of Commons International Development Committee inquiry into Debt Relief in low-income countries, Blackrock submission
About BlackRock
BlackRock is a provider of investment, advisory and risk management solutions, and we and our predecessor firms have been active in the UK for over 50 years. As an investment manager, we connect the capital of diverse individuals and institutions in more than 70 countries to investments in companies, projects and governments around the world.
Our clients in the UK include people from all walks of life invested in pension plans, as well as financial institutions, UK companies, and the UK Government, for all of whom we manage approximately £750bn. This includes the pension savings of more than 10 million people in the UK. We are a fiduciary to our clients, meaning the money we invest on their behalf is not our own, and without exception, we are obligated to always act in their long-term economic interests.
Sovereign debt exposures
BlackRock offers its clients the opportunity to invest in a broad range of investment funds. Through these funds, clients may choose to invest, for example, in UK and overseas companies, infrastructure products, renewable power generation and governments. The reasons clients may choose one fund over another varies significantly but include considerations such as long-term return, investment diversity, focused investment and investment stability. Entities which seek funding through investment may do so for a number of reasons. Governments seek funding from official investors (such as sovereign wealth funds and other nations) and private investors (asset managers such as BlackRock, on behalf of its clients) for a variety of reasons, such as raising capital to invest in infrastructure.
Investments in the sovereign debt markets by funds and accounts managed by BlackRock help provide most governments around the world – from developed through to emerging and frontier markets – with access to funding from financial markets. Whilst this funding can come in a number of forms, the majority of funding to emerging market (EM) countries’ sovereign debt comes through investments by clients in index investment products. i.e., portfolios constructed to match or track the components (be that companies, governments and other entities) of a financial market index (for example the J.P. Morgan Emerging Markets Bond Index Global Diversified Index).
Our responsibility as an investment manager when managing an index matching or tracking fund is to maintain exposure to all of the countries in the index, proportionate to their weight, for as long as they are in the index. This has two important implications for the purposes of this discussion:
- Where an index contains a given country’s bonds, we generally have very limited discretion as to when to buy or sell those bonds (absent a change in the composition of the underlying index, which is primarily controlled by third party index providers). Equally, we have limited discretion as to the price at which the portfolio of securities held in the index fund are bought or sold, i.e., we transact at the current market price. BlackRock’s indexed funds do not seek to outperform their respective index (or have a BlackRock index product perform better relative to any other investment manager’s indexed) because to do so would be a breach of our fiduciary obligation to our clients (as well as our regulatory obligations) to match the performance of the relevant index.
- Because we generally do not have discretion when to buy or sell a particular security, BlackRock is a committed long-term investor on behalf of our clients, and our clients benefit when the issuers of the securities in an index are in a position of financial sustainability and therefore perform well over the long term.
Finally, it is important to note that, while BlackRock may be one of the largest holders of the securities included in an index, due to our clients choosing to entrust BlackRock with their investments, and their selection of that particular index to track, BlackRock usually only manages a minority of any given issuance alongside many other investors.
Considerations underpinning our approach to sovereign debt restructurings
The lack of discretion as to when to buy or sell such securities (or the price at which to buy or sell) means that if a sovereign encounters difficulty servicing debt, or its debt burden becomes unsustainable, we believe it is in the best interest of our clients, as their fiduciary, to engage in constructive dialogue to seek a sustainable, long-term solution to a sovereign’s debt burden in accordance with established international protocols. In the absence of a constructive dialogue (which is further discussed below), the alternative, in many cases, may be that the sovereign cannot repay the debt, cutting off all payments and leaving our end-investors in a worse position.
We are therefore strongly incentivised to participate in sovereign debt restructurings in accordance with these protocols, and help drive progress towards sustainable, long-term solutions. Indeed, we have done so on several occasions in the past. Consistent with our fiduciary duty to our clients, when sovereigns are experiencing debt distress, we would hope to be part of a foreign creditor consensus around a restructuring transaction that is in line with established international policies and frameworks (as described below) for sovereign restructuring and which creates opportunity for a country’s sustainable growth and a return to international capital markets.
However, it would be very challenging – or potentially open up the possibility of civil liability for an asset manager acting as a fiduciary – for a single creditor to provide unilateral relief on debt that is held in its portfolios. In most cases, sovereign bonds are held by a wide range of creditors. A single (or even a handful of) creditor(s) that agreed to restructure unilaterally, that is without broad creditor support, will incur a loss while the remaining creditors will not – in effect, one group of creditors would subsidise the other. This may occur for a number of reasons, including if (as was the case in Zambia) the sovereign is seeking forgiveness of debt in the context of waiver or interest or a haircut to principal and only some bondholders would be providing the same while the other creditors would continue to have their debt serviced without waiver or haircut and receive greater return than those who agreed to provide relief. And while this may provide modest incremental relief in the short-term to the sovereign, it is unlikely to solve the overall debt sustainability issue in the absence of a workable restructuring plan involving a critical majority of creditors, that puts the debt on a sustainble long-term footing. Unilateral creditor debt relief therefore provides a less favourable outcome to issuers of sovereign debt relative to comprehensive relief facilitated through collective action by a requisite bondholder majority. As managers of our clients’ investments, BlackRock (and similar investment managers) therefore seek a comprehensive restructuring outcome that aims to return a country to debt sustainability.
There are several factors that, in our experience, contribute to a successful debt restructuring process that brings in official and private sector investors alongside multilateral institutions:
- A robust Debt Sustainability Analysis (DSA) undertaken by the International Monetary Fund (IMF) is generally an essential component in any successful restructuring. DSAs provide a comprehensive assessment of a country’s current debt situation, potential vulnerabilities, and potential paths to stabilise debt payments, keeping in mind the government’s policy commitments. IMF involvement in sovereign debt restructurings typically leads to better and more sustainable outcomes, as IMF programmes help support the government’s economic and fiscal reform programmes. The IMF typically will not approve any allocation of funds unless a DSA confirms that the government’s agreed economic and fiscal reforms, including the restructuring of its debt, will lead to the country’s debt being sustainable and having a DSA approved by the IMF may increase creditor participation in any proposed plan.
- A bondholder committee, with the participation of all official creditors, should be convened. In the case of low-income countries, the G20 has recently agreed to a “Common Framework” for managing sovereign debt restructurings that anticipate the involvement of an official creditor committee at an early stage. These committees provide the opportunity for creditors to receive information, and assess the restructuring plans of the sovereign, enhancing the likelihood of a consensual and rapid restructuring process.
- Finally, once terms have been negotiated and agreed by a critical majority of foreign creditors, all creditors should vote on the proposed terms of the restructuring. The size of majority required to amend repayment schedules varies depending on the terms of the relevant issuance – in some cases a simple majority is required, while others may require a two-thirds (or greater) majority. Most bond issuances since 2014 also include “aggregation collective action clauses”. These clauses allow voting to take place across multiple issuances in a single process, diminishing the risk of the restructuring process being stalled by holdout creditors.
BlackRock involvement in sovereign debt restructurings
BlackRock approaches all restructuring proceedings constructively and in good faith, considering any reasonable compromise which ensures that amendments are also sustainable for the sovereign
To provide a recent example, in July 2020, the government of Ecuador successfully restructured its foreign debt, with the participation of BlackRock and with assistance from the IMF. The restructuring process largely satisfied all of the criteria outlined above. The government of Ecuador presented a constructive proposal for restructuring and participated in negotiations with the bondholder committee in good faith. The resulting restructuring was completed in two weeks, and provided debt relief exceeding $10bn over the first four years, and $6bn more between 2025 and 2030. In the process, Ecuador’s average contractual coupon rate was reduced by 43% to 5.3%, with a reduction in the face value of outstanding debt of 9%.
Exposures to Zambian sovereign debt
We are aware of recent publications which suggest that BlackRock has been unwilling to negotiate with the Republic of Zambia over the restructure of its debt. These reports contain incorrect information about the level of investment by BlackRock funds and misrepresent BlackRock’s engagement in the restructuring process.
As of June 2022, our clients’ total exposure to Zambian sovereign debt is approximately US$220 million, in notional value across approximately 35 portfolios managed by BlackRock.[1] This represents approximately 7% of the total debt in issue, some US$3 billion foreign bonds outstanding, meaning BlackRock clients hold a small minority position. Of this, approximately 82% (US$180 million) is in index strategies and about 18% (US$40 million) in actively managed strategies.
It has been suggested that Blackrock clients could make up to 110% returns on their investment in Zambian government bonds. We do not think such estimates, which are hypothetical given the restructuring, take account of all the relevant factors, notably, inter alia, the current market price rather than the face value of the bond; the fact that coupons are not being paid because of the default, and the likelihood that a debt restructure would reduce the principle (and therefore return) on the bonds.
Engagement in Zambian sovereign debt restructuring
As indicated above, reports concerning BlackRock’s engagement with the Republic of Zambia on debt restructuring are incorrect and we are grateful for the opportunity to correct the record.
To be clear - at the time of writing, BlackRock has not been asked to participate in any formal, collective debt restructuring proceedings by the government of Zambia.
In September 2020, like all other foreign Zambian bondholders, the managers of BlackRock funds and accounts under management that hold Zambian sovereign bonds each received a “consent solicitation” - a process by which an issuer proposes changes to the material terms of a security agreement - from the Zambian government, directly requesting interest payment deferral from each bondholder. Notably, the consent solicitation was not accompanied by a formal restructuring proposal, the Zambian government had not engaged with the IMF for a DSA, and Zambian representatives did not actively engage with the ad hoc bondholder committee (a voluntarily convened committee of bondholders which, we understand, already constitutes a majority of the foreign debt) regarding the consent solicitation. Accordingly, the holders of a majority of outstanding bonds (measured by currency face value), including the funds and accounts managed by BlackRock, either abstained or declined to support the proposal in its current form.
We understand that Zambia is now in active discussions with the IMF and intends to engage with the ad hoc bondholder group on a formal restructuring. Consistent with the approach referred to earlier, BlackRock will approach comprehensive formal restructuring proceedings constructively and in good faith, with a view to obtaining a sustainable long-term outcome for Zambia whilst acting as a fiduciary to our clients.
BlackRock, 22nd June 2022