Egypt could convert part of the $12 bn of loans and grants pledged by Gulf nations this week into tradable bond securities, a lawyer working with the Egyptian government said. The lenders in question – Saudi Arabia, the UAE and Kuwait - will then have the flexibility to sell the bonds to other investors, should they wish to.
Qatar already has that option: Egypt recently converted $3.5 bn of Qatari loans into bonds through a newly established $12 bn Euro Medium-Term Note program. The loans made by the other three Gulf nations might be given similar treatment.
“The contributions from non-Qatar states are certainly capable of being represented by notes issued through theprogram,” said James Healy, a partner at law firm Skadden, which represented Egypt in connection with the establishment of the program.
According to the program’s prospectus, however, funds raised in the form of notes must be used to finance the country’s budget deficit, something that may be less attractive for Egypt compared with the alternative of keeping the money on deposit in the central bank.
“Notes issued through the program have been authorized under the budget law and have to be used to reduce the budget deficit,” said Healy. “Egypt may have more flexibility if they leave the funds as deposits with the central bank, as these can be used to increase foreign reserves.”
While turning foreign loans into bonds reduces Egypt’s flexibility, the conversion brings clear advantages for the lenders, providing them with tradable securities and formalizing the terms of the loans under English law.
“The key advantage is the potential tradability of these securities, which would suggest Qatar might have considered trading them before maturity,” said Healy.
Earlier this month, Egypt converted $1 bn of Qatari loans into bonds under the program, which is led by HSBC and QNB Capital.
The new $1 bn three-year bonds were issued on July 1 at part yield 3.5%. The transaction follows a $2.7 bn 18-monthsenior unsecured deal that was issued in late May at a yield of 4.25%.
The conversion has another advantage for Qatar, as bonds provide extra protection in the event of Egypt defaulting.
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