RESCHEDULING OF THE EXTERNAL DEBT: LONDON CLUB
Contribution by Professor Oluwole Akanle*
(Article Reference: Document No.1, Chapter 3, February 1992)

The debt crises of the early 1980s which swept through the world left the economies of developing members of the world community severely battered. Remedial measures taken since then have had little or no positive impact on a great majority of the affected economies. In many economies, the measures have even worsened the conditions of these countries. Huge debts have been accumulated to execute non-productive projects and with depleting resources from other sources they could not service these debts. Furthermore, the preceding reason was largely a result of decades of social, economic and political policies in these countries that are greatly antithetic to economic growth and development, the culmination of which was the collapse of several of these economies.

The debt crisis which reached a peak in 1982 actually had its genesis in the mid 1970s. The oil crises of 1973, as a result of the Arab-Israeli war, and that of 1979, meant a windfall in terms of increased income for petroleum producing countries of the third world. Thus, in the face of such massive build up of surplus capital by OPEC countries in Western Banks and in order to avoid recession, OECD countries actively encouraged the recycling of this built up capital through extension of loans to developing countries on very liberal terms, and often without careful credit analysis.

One unfortunate aspect of the borrowing spree was that the borrowed funds went, in most cases, to the purchase of consumer items, obsolete equipment and machinery, or were procured for projects that never took off or later became "white elephants". Reference has to be made to the fact that most third world countries were just emerging from the experience of colonization. This meant that aid and foreign direct investments slowed to a trickle as a result of various political reasons. In the absence of essential capital needed for infrastructural developments, the next resort was borrowing. This resulted in a gradual build-up in the external debt of third-world countries from the 1970s until it reached unmanageable proportions in the early 1980s.

Finally, in the multidimensional genesis of the debt crisis, it is pertinent to mention that a drop in the prices of primary commodities worldwide in the late 1970s and early 1980s were also causative agents.

It is also pertinent to mention the fact that the debt crisis would definitely not have reached its present proportion without lack of foresight and mismanagement exhibited by many developing countries themselves. The level of corruption and political instability present in developing countries is a well known factor. At the same time, most third world loans were applied to the production of non-revenue generating social services like roads, bridges etc. and the purchase of consumer goods. In those instances where loans are applied to revenue generating projects, the endemic problem of lack of governmental managerial expertise played against profitability. In many instances, the revenue generated was often not sufficient to service the loans.

In this short paper, attention is focused on debt rescheduling. Debts owed by developing countries are usually rescheduled in the London Club or the Paris Club. London Club reschedulings involve debts owed to commercial banks while Paris Club rescheduling concerns debts owed to official creditors. The main item of discussion here is London Club Rescheduling.

What is the London Club?

The London Club is an ad-hoc grouping of commercial banks exposed to third world debts. In contrast to the Paris Club there is no formal framework for restructuring commercial bank loans. The name "London Club" came into being since the "Club" sits in London which is regarded as the financial nerve centre of transnational banks. Though referred to as a club, it is not a formal body with fixed membership.

In the absence of a formal framework for rescheduling, the banks with the greatest exposure to a country seeking to reschedule its debts will form a committee to cater to the interest of all commercial banks with loans to that country.

The Committee formed is commonly referred to as a Bank Advisory Committee (BAC) or Steering Committee of Commercial Banks. The Committee frequently establishes close links with the IMF in order to ensure an alignment between a debtors' financial requirements and the maintenance of viable economic programmes.

Preparation of Rescheduling with the London Club
	The steps dealt with in this section include;
		a. Declaration of Moratorium. b. Planning in the Restructuring Process. c. Bank Advisory Committee/Steering Committee. d. Preparation of an Information Memorandum. e. Exploratory Meeting. f. Negotiation of Heads of Terms

a. Declaration of Moratorium
The restructuring process, in relation to sovereign restructuring, commences following an announcement by the debtor state authorities of a specific cut?off date upon which it proposes to suspend payment of its obligations. This is also accompanied by an announcement of the opening of negotiations to reschedule.

A legal problem that often necessitates the declaration of moratorium by a debtor nation, is that the declaration acts to forestall any attempt on the part of some creditors with minimal exposure to the debtor country to take unilateral legal action that may be ordinarily available to them under the original credit agreement e.g. foreclosure, litigation, set-off, etc. But resort to any unilateral action by a creditor after the declaration of moratorium by the debtor may have a trigger effect as all other creditors would almost invariably resort to taking action to enforce the debt owed. Thus, the usefulness of a declaration of moratorium is that it serves as a notice to all creditors to withhold action they might wish to take against the debtor for the enforcement of their rights under the original agreements while they await further developments.

b. Planning in the Restructuring Process
The preparatory or planning phase is the most important phase in any process. This is no less true in a restructuring process. The problem with most developing countries' restructurings, as in many other areas, is the absence or near absence of proper planning.

The preparatory work in relation to sovereign restructuring includes:

(1)	Collation of data on the nature, categories and extent of debts owed by the country. This should not be limited to government contracted debts only but should extend to:
	a.	obligations of the Central Bank in respect of private sector debts or commitments;
	b.	debts owed by its departments, agencies and parastatals;
	c.	private sector debts whether or not guaranteed by the government.
(2)	A detailed analysis of these debts should be undertaken. Such an analysis should seek to categorize each creditor by:
	a.	amounts outstanding by currency;
	b.	principal repayments and interest payments falling due over certain periods;
	c.	effects of fluctuation in foreign exchange rates and interest rates;
	d.	the extent to which the debt is of a short-term nature.
	All these would assist in the forward planning and the mapping-out of restructuring strategies, especially at the level of new funds to be requested as well as the consolidated and repayment periods.
c. Bank Advisory Committee/Steering Committee
Generally, the Bank Advisory Committee (BAC) represents the interest of all commercial bank creditors in the rescheduling process by acting as a channel of communication between the debtor and its creditors and by undertaking the negotiation and documentation of the rescheduling agreements on behalf of all the banks. The BAC usually comprises between 5 and 15 members. The Chairman represents the bank with the single largest exposure to the affected country. The other members largely represent banks which are major creditors of the country. They are usually from a few countries. The BAC usually operates through sub-committees. The most common ones are;
	(1) The economic sub-committee. (2) The debt reconciliation and classification sub-committee.
d. Preparation of an Information Memorandum
The Information Memorandum provides creditor banks with pertinent information on the debtor country's situation so as to enable them to come to rational decisions on the restructuring package. A country should exercise great care in the preparation of the Information Memorandum. Exaggerated claims should be avoided in the preparation of the Information Memorandum as claims therein will form the basis of certain representations and covenants in the main agreement or it could be a bottleneck as to how new funds could be obtained or the determination of the extent of the financing gap. Consequently, information should be as realistic as possible. The contents of an Information Memorandum should include:
	-	recent economic and financial developments in the country;
	-	adjustment measures embarked on or to be embarked upon;
	-	recent trends and forecasts of budgetary operations;
	-	external trade and balance of payment position;
	-	outstanding debts as of date of preparation and forecasts of debt service;
	-	funding requirements and sources of meeting the re quirements
e. Exploratory Meeting
This is the first official contact between the debtor country and the BAC. Here, the case of the debtor country is formally presented before the BAC. Apart from the verbal presentation, the Information Memorandum is also submitted for the BAC to study and disseminate among creditor banks. It may be noted however that the BAC may not distribute the Information Memorandum at this stage. At times, it is distributed at the same time with the Heads of Terms (HOT). It is at this meeting that broad agreements are reached on maturities to be rescheduled and other administrative issues pertaining to the restructuring exercise. These include fees chargeable by the Agents and reimbursable expenses of the steering committee. Debtor countries are well advised not to publicize the outcome of this exploratory meeting as it may "boomerang" if over publicized.
f. Negotiation of Heads of Terms
This is yet another important phase of the restructuring process. Indeed, if lawyers have not been directly involved before this stage, the damage to the process may not be much. However, the presence of the lawyer becomes absolutely necessary at this stage.
Role of the Lawyer in Rescheduling:
Although most of the issues to be settled here are generally regarded as business or financial issues,. the lawyer has responsibility in ensuring that;
	a.	Whatever business term is accepted is properly understood and would be such that would not encumber future documen tation.
	b.	He/she should also ensure that all the issues are related to each other, i.e. seen in light of the overall objective. Consequently, he/she should constantly bear in mind the debtors capacity to implement without technical default.
	c.	He/she should also be on the look-out for possible legal bottlenecks that certain demands of the creditors might create, and if necessary suggest alternative ways out. In this way, protracted negotiations at the documentation stage could be avoided.
Functions of the Lawyer in Rescheduling:
	a.	To ensure that his/her client does not have to pay more than necessary through the drafting of the Agreement.
	b.	To minimize administration cost of the Agreement to what is necessary e.g. information requirements.
	c.	To avoid technical defaults that do not affect servicing capability of debtor.
	d.	To ensure that penalty is payable only when there is willful refusal or neglect to pay.
Conclusion The debt rescheduling terrain is a slippery one and many third world countries have continuously lost their footing on it. They must quickly regain it or else face the alternative, which is to remain perpetually within the debt trap.
* Professor 0luwole Akanle (Nigeria) - From 1986 to the present, Professor Akanle has been Coordinator of Research and Acting Director of Studies at the Nigerian Institute of Advanced Legal Studies, University of Lagos. From 1986 to 1988, Special Assistant to the Attorney-General of the Federation and Minister of Justice. From 1976 to 1982, Lecturer at the University of Ife (now Obafemi Awolowo University). Since 1986 he has participated in several negotiations on behalf of the Government of Nigeria, including the London Club rescheduling negotiations. Born in 1949, Professor Akanle obtained an LL.B (Honors) and an LL.M from the University of Ife and a B.L from the Nigerian Law School. He is the author of several books.
(The above author profile was written in February 1992)