Papers Relating to the Foreign Relations of the United States, 1920, Volume II
Mr. C. H. Hand, Jr., of Brown Brothers and Company, to the Acting Chief of the Division of Latin American Affairs, Department of State (Welles)
Dear Mr. Welles: I am enclosing herewith a memorandum showing the plan which we thought might be followed in refunding the Ecuadorian foreign debt,10 as I promised I would send you upon my last visit to Washington when you were so kind as to say that you would cable the Legation at Quito to the effect that Mr. Lindberg would have this matter in hand for us and notify the Legation to cooperate with him.
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Very truly yours,
Plan for the Refunding of Ecuador’s Foreign Debt
The Republic of Ecuador will authorize an issue of bonds to the amount of say $20,000,000, interest and principal to be payable in [Page 186]dollars in New York and London, to mature in not less than seventeen years from date of issue, and to be retired by a cumulative sinking fund operating by annual drawings at par or purchases in the open market under par; rate of interest and sinking fund to be left to the discretion of the Minister of Finance; rate of interest on bonds issued to convert old bonds to be 8%; rate of interest on additional bonds to be left undetermined except for the fixing of a maximum if desired; rate of sinking fund on entire authorized issue to be 2 or 3% per annum. The Minister of Finance will be authorized to issue such bonds in an amount sufficient to convert on bases approved by him, the bonds of the various present issues; additional new bonds to be issued by the Republic only on the following conditions:
- If in the three consecutive fiscal years preceding, the average of the total of the revenues of the Republic shall exceed all Government expenditures for that year, including in such expenditures service of the new bonds and charges incidental thereto as set out below and the service of the old bonds (to such an extent as may be agreed upon with the holders of such old bonds or with a majority of such holders) and if the average of the total customs revenues for such three preceding fiscal years shall have amounted to more than 150% of the charges thereon, additional bonds may be issued to an amount the annual service of which shall not require more than one-half of such excess total revenues and on condition that the total of such new annual service, added to the charges then existing, shall not exceed 66⅔% of the total customs revenues.
- Even though the conditions set out in (a) are not present, additional bonds may be issued upon the approval of the bankers.
The new bonds will be secured by a pledge, creating a property right immediately effective, to a United States bank or trust company or other institution to be named by the bankers, as trustee, of the entire export and import revenues, including all taxes collectible by the customs house, subject to such other prior liens as there may be.
The Republic will provide simultaneously with the issue of the new bonds that the export and import revenues shall, so long as any of the new bonds may remain outstanding, be payable only in revenue warrants of a character and form to be determined; warrants to the full estimated amount of the proceeds of such revenues for the life of the new bonds to be issued in convenient denominations to a United States corporation (Connecticut, Maine or Delaware) as depositary, to be designated by the bankers, to be formed for the purpose, and whose charter shall be sufficiently broad to permit the establishment of a bank in Ecuador. The depositary will maintain such offices in Ecuador as may be necessary and perform the duties hereinafter set out. The depositary will sell to exporters [Page 187]and importers revenue warrants at par, such warrants to be valid only upon counter-signature by the depositary, and to be redeemable by the depositary at par, at any time within four months after the date of issuance thereof. The customs officials will mark upon the back of the cancelled warrants the customs entry number referring to the shipment lot on which such warrant is paid, or if paid for some incidental tax, this fact shall be noted upon the warrant. Cancelled warrants will be returned to the depositary on the day of their receipt, or if this is not possible, on the next business day. Daily statements of the operation of the custom house will be rendered to the depositary, including a complete copy of the customs house entries for the day. Certified manifests of each outgoing and incoming steamer received during each day will be delivered by the customs officials to the depositary. Provision should be made for inspection at border points to prevent smuggling if necessary and possible. (Mr. Lindberg will suggest such additions and changes to the provisions hereinabove set out for the purpose of checking the warrants received against commodities exported and imported as he may deem feasible and advisable after he has examined the situation on the spot.)
In any case where the duty on a shipment is not possible of exact payment in warrants, because of the presence of a fractional amount less than the smallest denomination in warrants, the next higher denomination in warrants shall be delivered to the customs authorities in payment of the fractional amount and the customs authorities shall note on the back of such warrant the fact that it represents excess payment and the amount of such excess, giving the details as to the shipment, the amount and date of such shipment, the name of the party delivering such warrant, etc. Such warrant shall, after cancellation, be returned to the depositary in company with any other warrants received in connection with such shipment as a separate item. The party making such excess payment in warrants to the customs house, upon application at the office of the depositary, shall receive reimbursment in cash for the amount of excess. (Mr. Lindberg will look into the possibilities of handling this situation in a more simple manner when on the spot.)
The proceeds of the sale of warrants will be disposed of as follows:
First, the depositary will deduct and pay to itself monthly a commission of … % of the total amount of all warrants sold during the preceding month and, in addition, an amount necessary to reimburse itself for its expenses during the preceding month.
Second, the depositary shall deduct and pay monthly to the Minister of Finance an amount sufficient to cover the cost of collection of customs during the preceding month, as determined by a statement [Page 188]of the Minister of Finance, said amount, in no case, to exceed 5% of the gross amount of such collections.
Third, the depositary shall set aside such amount as may be decided upon as a reserve for the redemption of outstanding warrants.
Fourth, so long as any of the old bonds remain undeposited and outstanding, the depositary shall deduct such amounts and at such times, as may be agreed upon in the contract between the trustee as holder of the old bonds and the Republic, for service of the old bonds, and, also in accord with such agreement, such amounts shall be applied as follows: First, to the remittance monthly to the fiscal agent of the new bonds of such proportion of the interest and sinking fund on the new bonds and of the charges for the service of these bonds so that the entire amount necessary for payment of interest at the next interest date and the semi-annual proportion of sinking fund and the corresponding proportionate amount of charges for service shall be in the hands of the fiscal agent at least one month prior to the semi-annual interest date; Second, the depositary shall next deduct and remit to the bankers monthly an amount equal to one-twelfth of the sum of the commission to be paid to the bankers in compensation for their services in negotiating the conversion and the amount of their expenses in connection therewith. (When the commission and expenses of the bankers shall have been paid in full, this application of the proceeds of the warrants shall, of course, thereupon cease.)
Simultaneously with the deduction by the depositary of amounts for interest and/or sinking fund on any class or issue of old bonds, the depositary shall deduct a proportionate amount corresponding to the amount of the bonds of such old class or issue which shall not be deposited with the trust.
Fifth, if the amount to be deducted by the depositary for the service of old bonds shall at any time not be sufficient to meet the items set out in “First” and “Second” of “Fourth” then the depositary shall deduct such further amounts as may be necessary to make up the deficiency and shall apply such amounts to these purposes in the order established above.
Sixth, at the end of each month the corporation shall pay to the Minister of Finance any balance which may remain in its hands less such amount as may be necessary to equal in one year one-fourth of the amount of the service of the new bonds to be retained by the depositary for the purpose of a reserve for the future service of the bonds of the Republic, such deduction to continue for four years or until a reserve equal to the amount of one year’s service of the new bonds shall have been accumulated. Such reserve shall be used only in case the revenues on hand at any time are not sufficient to meet the charges set out above and in the event that at any time it shall become necessary to use all or any part of such reserve, similar deductions shall thereafter be again made by the trustee until the reserve shall have been completely renewed.
In the event that all of the bonds of the old issues shall at any time be deposited with the trustee, the deductions for account of [Page 189]interest on old bonds above set out shall cease and the proceeds of the warrants shall be applied by the depositary to the ultimate purposes set out above, in accordance with the agreement between the Republic and the trustee as holder of the old bonds by which the old bonds release their lien on the revenues pledged to the new bonds.
The Republic will agree with the trustee, as holder of the deposited bonds of the old issue, that, in payment of accrued and/or current interest and/or proportionate amounts of accrued and/or current sinking fund on such bonds of the old issue in the order of priority of such liens as they may possess upon the customs, the depositary shall deduct and pay to the trustee each month from the proceeds of the sale of warrants, after deduction of the commission and expenses of the depositary, the expenses of collection and the reserve for redemption, an amount sufficient to meet one-fifth of the current six months’ interest and one-tenth part of the annual sinking fund due on the new bonds, together with proportionate amounts of the charges for the service of such bonds and the commission of the fiscal agent, and until the commission of the bankers shall have been paid, one-twelfth part of the commission of the bankers, or such part of the total of the above items as the total amount of accrued and/or current interest and proportionate amounts of sinking fund on the deposited bonds of the old issue shall equal, and it shall be further agreed that such amounts shall be turned back to the depositary and applied for the payment of interest and sinking fund and service charges on the new bonds and for the payment of the commission and expenses of the bankers.
The agreement shall further provide that if and when all of the bonds of the old issues shall have been deposited with the trustee, then the trustee will release any lien such bonds may have on the customs revenues in favor of the bonds of the new issue.
Export and import duties are not to be pledged for any other proposition without the consent of the bankers and rates of such revenues are not to be changed without the consent of the bankers.
As a further security the bankers will, under authority of the Republic deposit with the trustee of the new bonds the old bonds obtained for the Republic through conversion or purchase. Provision will be made that all rights to interest on such bonds due from the railroad and moneys paid for the redemption or purchase of bonds by the sinking fund shall be vested in the Republic unless in any six months’ period the proceeds from revenue warrants shall not, after application in due order of priority be sufficient to pay the interest and sinking fund on the new bonds in the method provided, in which case all such rights shall be vested in the Trustee for the new bonds [Page 190]who shall collect such moneys and apply them to the interest on the new bonds until the deficiency has been cured. Upon retirement of all of the new bonds the trustee of these bonds shall deliver the old bonds to the Republic and all rights of the trustee in such bonds shall cease and determine.
The Minister of Finance shall appoint the bankers agents of the Republic to negotiate for an exchange of the new bonds for bonds of the various old issues on bases to be agreed upon between the bankers and the Financial Minister; the bankers to have entire discretion at all times as to the advisability of going forward with the operation; all powers necessary, under the circumstances, to satisfactorily negotiate for such conversion, including the power to incur reasonable expenses, to be reposed in the bankers.
It may be deemed advisable by the bankers at some time during the course of the operation to purchase certain or all of the old bonds from the present holders; the bankers would have entire discretion as to this but would act only after agreement with the Financial Minister; in such case the funds advanced by the bankers would constitute a loan from the bankers to the Republic for which the bankers would be reimbursed by new bonds to be taken by the bankers on bases to be agreed upon.
The bankers will exert their best efforts to effect a conversion of the bonds on the bases determined.
Upon notification by the bankers to the Minister of Finance at any time within one year after the signing of the primary contract between the bankers and the Republic of Ecuador, that contracts or options for the conversion or purchase of sufficient old bonds or new bonds have been entered into so that in the opinion of the bankers the operation will be successful, the Minister of Finance will issue to the bankers new bonds to the necessary principal amount. From time to time thereafter, as the bankers shall notify the Minister of Finance that they have entered into further contracts for the conversion or purchase of any of such old bonds within the bases set by the Minister, the Minister shall issue further bonds to effect such conversion or to obtain the funds for such purchase. The bankers will thereupon effect the exchange or purchase as the case may be and upon receipt of the old bonds will deposit the same with the trustee as security for the new bonds.
Interest on new bonds accrued prior to the date of their exchange for old bonds will be retained by the depositary and credited to the surplus hereinbefore provided for.
The bankers will receive as commission for their services in cash . . % of the par value of the old bonds exchanged to be paid out of proceeds of warrants as stated before; the bankers to be reimbursed [Page 191]in cash for any expenses which they may incur in the entire negotiation, also to be repaid out of the proceeds of warrants, as stated before, the bankers’ statements as to expenses to be accepted as final; in case conversion should fail of accomplishment, bankers to be reimbursed in cash for any expenses which they may have incurred. (Method to be worked out by Mr. Lindberg on the spot.) The bankers will be appointed by the Minister of Finance as fiscal agents of the Republic and receive for their services in this connection a commission of 1% per annum on amounts disbursed for interest and sinking fund.
All disputes or disagreements between the Republic and the trustee or the bankers or the fiscal agent or the depositary will be submitted to the arbitration of a member of the Ecuadorian section of the International High Commission and a member of the United States section of the International High Commission, or their nominee, whose decision shall be final and binding to all parties. In the event that these two shall disagree, they shall choose a third party, an officer of the International High Commission or his nominee or the President of the Institute of International Law or his nominee whose decision shall be final and binding on all parties.
- Based on a plan submitted to the Department July 15, 1920 (file no. 822.51/302).↩