CHILE MAY USE COPPER TO COLLATERALIZE DEBT

CHILE MAY USE COPPER TO COLLATERALIZE DEBT

Chile expects to sign an agreement by the end of June with its 320 creditor banks for collateralizing its debt, but the agreement probably will not mimic the Mexican bond-for-debt program, a Chilean central bank official said.

Any debt conversion buy-back program will probably involve the reserve that Chile is building from copper earnings, he said.Under an agreement with the World Bank, Chile takes the proceeds from its copper sales that exceed 75 cents a pound and puts them in a special windfall fund that can be used to amortize Chilean debt.

The foreign reserves from this fund can be used either as collateral for a new debt instrument, to buy back debt directly on the secondary market or for whatever innovative approach Chile can devise - provided its 320 creditor banks agree.

Chile now has about $350 million in the fund. If copper prices average about 90 cents a pound for the rest of 1988, as Chile expects, it will have about $500 million by the end of the year for direct buy-backs or for collateralizing a new debt instrument.

Whether or not Chile actually executes any debt-retirement program based on the expected agreement with its creditor banks will still depend on the overall economic outlook, the official said.

We are going to take a conservative approach, the central bank official said. Even if we have the money for a new swap program, whether or not we engage in it depends on the movement of international interest rates and the condition of the Chilean economy. We want to make the best use of that money that we can.

The official said Chile has analyzed the Mexican solution, and it is not attractive at all for us.

In the Mexican bond-for-debt swap, Mexico retired about $3.66 billion of its debt by issuing $2.56 billion in bonds in return. Mexico collateralized its bonds by purchasing $2.56 billion of special issue, U.S. zero-coupon bonds with a 20-year maturity.

Chilean reluctance to emulate the Mexican approach has nothing to do with world perceptions of Chilean political repression, the official said. Fears that the United States, under pressure from human rights groups, would not offer the same kind of exit bond to Chile that it offered to Mexico as debt collateral are not at issue, he said.

The problem, the official said, is the economics of a debt-for-bond swap. Analysis done by Chile's central bank indicates that Chile might get trapped into paying so much for the debt that it cannot at least break even on its interest payments, the official said.

He said Chile's break-even point on its interest payments is 70 cents on the dollar. A bond program that buys back debt at a higher price pushes Chile's interest-rate payments above that break-even point.

The whole purpose of exchanging the old (debt) for the new is to lower interest payments, the official said. It makes no sense to do it otherwise.

Chile's central bank noted that Mexico, in issuing its bonds, in effect bought back debt for roughly 70 cents on the dollar, even though Mexican debt had been quoted on the secondary market in the 48 cents to 50 cents range.

The Mexican experience indicates that whenever existing debt is swapped for a new debt instrument - such as a bond - the issuing country probably gets a smaller discount than if it purchased the debt for cash on the secondary market.

By issuing its bonds, Mexico in effect paid a premium of about 20 percentage points above the secondary market to buy back its debt.

Chile believes it would also have to pay a premium if it issued a bond, the official said. Chilean debt is selling at 60 cents to 63 cents of original $1 face value on the secondary market. With a break-even point of 70 cents, Chile has a buffer of only 7 cents to 10 cents. That is presumably too narrow of a buffer on which to risk issuing a new debt instrument, the official said.