A Handbook on Conversion of Less Developed Country IDBBT to Equity

As a result, banks are willing to sell debt paper at a discount to rid themselves of the problem. Multinational corporations, individuals, and other entities are willing to buy this debt paper either because they feel the debt will be repaid or more likely because they feel they can negotiate to convert the debt paper into investments in the LDC (debt-equity conversion). Countries have established programs for converting foreign debt obligations into investments. In several instances, the purchasers of LDC debt were organizations interested in aiding the basic development of the country, particularly for environmental protection. This has led the Agency for International Development to advocate and promote the concept of debt for development. Knowledge of the secondary markets for LDC debt and the various country programs needs to be disseminated. The rationale for debt conversion is multifaceted. For banks, the pros include the probability of default, net asset value, and anticipated earnings streams. However, the cons include loss incurred when selling debt at a discount. For countries, the pros of debt conversion include reducing foreign debt obligations, promoting foreign direct investment, and channeling FDI to priority sectors of the economy. However, the cons include the risk of inflation, the threat of MNC domination of the economy, and the future outflow of funds from the country due to profit remittance and capital repatriation. Multinational corporations also have a rationale for debt conversion. The pros include lower initial investment costs, higher anticipated returns on investment, and compensating for the degree of country risk. However, the cons include the potential for more stringent profit remittance and capital repatriation restrictions.