821.51/2498a

The Chief of the Division of the American Republics ( Duggan ) to Mr. John C. Traphagen of the Foreign Bondholders Protective Council

Dear Mr. Traphagen: There is enclosed herewith a copy of a memorandum entitled “Proposal for Settlement of Direct Funded Debt of Colombia.” The bases suggested in the attached memorandum differ slightly from those discussed when you were here last Saturday. As I informed your Secretary over the telephone today, I would be glad to talk with you about this on the telephone at your convenience.

Sincerely yours,

[File copy not signed]
[Enclosure]

Proposal for Settlement of Direct Funded Debt of Colombia

The proposal relates to the approximately $45,400,000 of outstanding direct funded debt of Colombia, it being understood that, if a settlement can be agreed to, the matter will not be made public pending an attempt to negotiate a settlement of the relatively insignificant outstanding amount of Government guaranteed Agricultural Mortgage Bank bonds.

The proposal is as follows: One-half of the 5-years’ interest arrears would be funded, thus increasing the principal amount of the debt by approximately $6,500,000. Taking into account cancellation of repatriated bonds and amortization under the temporary debt settlement, the principal amount of the debt after such funding would be about $50,500,000. The settlement would call for 3½ percent interest, and any saving in interest as a result of amortization would be used to retire bonds, thus making a fixed annual charge of about $1,767,500. In addition, there would be a sinking fund obligation to retire a minimum of $600,000 face amount of bonds a year, which would require about $200,000 a year on the basis of current market prices for the bonds. [Page 701] The maturities would be appropriately extended, presumably in the neighborhood of 1970 or 1975.

Such an arrangement could be expected to retire the bonds by maturity and would not require for full service, except upon the near approach of maturity of the bonds or given an extraordinary recovery of Colombia’s international credit standing, much in excess of $2,000,000 a year unless the bonds should increase in price over current levels to an extent which is not to be anticipated.

In the event that a settlement along the above lines should appear practicable, the possibility of some modification in the sinking fund requirement, in the nature of an ultimate concession by the bondholders to bring about agreement, should be considered as open for future consideration. For instance, a waiver or reduction during the first few years of the settlement to guarantee that the total annual cost to the Colombian Government during these years would not be in excess of $2,000,000, or, a flat reduction operative throughout the life of the settlement, in the sinking fund requirement that $600,000 face amount of bonds be redeemed annually, might be possible without destroying the substance of the settlement. As a condition of any such ultimate concession in connection with the sinking fund, however, Colombia would guarantee minimum service in dollars of $2,000,000 a year during the period in which the concession was operative.