(Bloomberg) -- Mitu Gulati, a University of Virginia law professor, has studied a lot of sovereign debt defaults and restructurings over the years. One clear conclusion he’s come to: Countries get “screwed” when they toss in complex financial instruments as a sweetener to convince creditors to accept the deals they’re proposing.

So when Suriname unveiled an agreement this month that includes a high-fangled security pledging to hand creditors a cut of a potential oil bonanza, it got Gulati’s attention.

In theory, he says, these sweeteners “are beautiful.” Both sides should win. But in practice, government officials give away way too much, mortgaging the country’s income streams, for what they get out of investors up front. “And then future generations of the country,” he says, “potentially get completely screwed.”

This puts Gulati directly at odds with a growing chorus of voices on Wall Street who argue that the time has come to bring back value-recovery instruments, or VRIs, as the securities are called, and use them to jumpstart stalled debt-restructuring talks across emerging markets.

Suriname has had plenty of company in default the past few years — Lebanon, Zambia and Venezuela, among others — and with interest rates soaring across the globe, speculation is mounting that there are more to come. 

Advocates of VRIs say lessons have been learned from past mistakes and that deal terms can be structured now to better protect government coffers while still luring in investors and cinching deals — a key step for a defaulted country as it seeks to regain access to international capital markets. Suriname’s deal, which put a cap on total future oil payments to investors, should serve as a template for others, they say.

“This is a significant evolutionary step forward for countries that have future potential,” said Ajata Mediratta, president at Greylock Capital Management, a hedge fund that was among creditors involved in Suriname’s deal-in-principle. “It’s just a way of aligning bondholders and the country, a way of bridging a divide in a fair and efficient fashion.”

Gulati is unswayed. He can’t forget the restructurings that followed Argentina’s 2001 default on $95 billion of debt, in which the country issued warrants that paid out when the nation’s growth rate surpassed a certain threshold. At the time, the warrants were hard to assess and most investors assigned a negligible value to them. 

But they’ve ended up costing the government upwards of $10 billion — a hefty sum for a sweetener that did little to lift bondholder participation rates and ward off the costly lawsuits that would come. Decades later, the warrants are still adding to Argentina’s financial malaise. 

“They didn’t get much in the front end,” Gulati said. “And they ended up having to pay a lot.”

For all the talk about how dealmakers have learned to refine these agreements, Gulati said fundamental problems remain. The GDP warrants included in Ukraine’s 2015 restructuring presented their own set of challenges — at least until investors agreed to new terms proposed by the war-torn country that defer and cap potential future payouts.

VRIs, in some form or another, have been around for decades. In the restructurings that followed the debt crises of the 1980s, warrants linked to the price of oil were attached to some of the new bonds issued by crude-exporting countries. 

To Lee Buchheit, a lawyer with more than four decades of sovereign debt-restructuring experience, it was not always worth it for these governments to dole out sweeteners to their creditors. The ultimate deal terms, he said, were rarely any better than they would’ve been had the nation opted for a classic, plain-vanilla bond exchange. 

Even so, the veteran of more than two dozen debt restructurings has come around to the idea of VRIs — particularly if they offer an upfront value to both negotiating parties. 

“Ultimately, it will come down to a bid-and-ask. Both sides will cement their positions and something will be needed to try to bridge the difference,” Buchheit said. “And these seem to be the instrument of choice.”

In Suriname, creditors wanted a sweetener linked to unrealized oil royalties, making it a central part of the negotiations to strike a deal. That makes the upfront benefit for the former Dutch colony clear: The tool was needed to exit a messy bond default and move closer to reinvigorating a key lending program with the International Monetary Fund.

Breaking Logjams

The argument for these sweeteners going forward, at least according to their proponents, is that they give countries and investors a way to compromise. The need has rarely ever been so great to solve sovereign debt crises — a problem that the International Monetary Fund, Group-of-20 nations and others have struggled to address.

Greylock’s Mediratta pointed to Lebanon, which has been mired in default since 2020. The nation’s offshore gas fields have yet to be exploited to their full potential, he said, giving the government something to offer investors. Greylock holds some Lebanese debt.

Carl Ross, a partner and sovereign credit analyst at Grantham, Mayo, Van Otterloo & Co. in Boston, said there’s potential for Suriname’s deal to set the stage for talks in oil-pumping and sanction-tangled Venezuela, too.

“If there’s ever a day where we can negotiate some sort of a deal with Venezuela, I think that could be one,” said Ross, a member of the Venezuela creditor committee who also participated in the Suriname negotiations.

In Sri Lanka, bondholders have already been weighing a proposal to swap defaulted bonds with new GDP-linked securities. Authorities said they’re open to considering “any kind of provisions,” within reason, that will help get a deal done.

Read More: Lazard Says Sovereign Defaults Need New Tools to Break Logjams

New Take on Old Tools

Suriname itself spent more than three years locked in talks with holders of $675 million of foreign bonds before using its oil-linked sweetener to break the gridlock.

There, investors finally agreed to accept losses of 25% on their holdings in exchange for new dollar bonds and a special security that pays out if oil discoveries off the coast make the government cash-rich.

Payouts would begin after the government receives at least $100 million of oil royalties through the commercial development of an offshore reserve known as Block 58, which driller APA Corp. says is one of “the most watched” on the globe. After that revenue threshold is reached, the government would allocate 30% of annual royalties to make payments on the instrument until it matures in 2050.

Energy firms TotalEnergies SE and APA have yet to make a final investment decisions on the fields. Still, some have made comparisons to neighboring Guyana, where a coalition led by Exxon Mobil Corp. expects to produce 1.2 million barrels per day by the end of 2027.

Suriname last week reached a staff-level agreement with the IMF, a necessary step for the restructuring deal with creditors to move forward. Come mid-June, and as long as the deal is finalized, investors will be left to price the new instruments on the secondary market. 

Unlike the deals of the past, Suriname’s oil-linked security “has a greater degree of concreteness and assurance,” Buchheit said. “I would expect that this value recovery instrument will actually have value on the day that it’s issued.”

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