Memorandum of Understanding Between the Government of El Salvador and the Foreign Bondholders Protective Council, Inc.73

The Government of El Salvador will offer to pay interest on the dollar and Sterling bonds at present outstanding at one-half of the rates fixed by the contract of 1922.74 The Government will provide a minimum of $800,000 U.S. Currency per annum for interest and amortization on the A, B, and C bonds now outstanding, and on the proposed new funding bonds representing back interest. It is understood that the bonds which have been or are being purchased by the Government are not included. So much of this sum as is not needed for interest service will be used for purchases in the market if the bonds are selling below par; or for drawings for redemption at par when the bonds are selling at par or above.
The Council understands that the Government plans to use the proceeds of the new coffee export tax exclusively for the service of its now outstanding debts, so that a considerable sum may be available for additional amortization in certain years. If such additional amortization is effected, bonds retired in excess of contractual requirements may be taken into account in calculating amortization requirements in subsequent years.
Seventy-five per cent of such portion of the $800,000 annual service fund as is available for amortization will be applied to the retirement of the bonds of Series A and Series C. Not less than 37½% and not more than 45% of the sum available for amortization will be applied to the retirement of bonds of Series A and not less than 30% nor more than 37½% to the retirement of Series C bonds and the new 3½% funding bonds representing back interest on the A and C bonds. All bonds will be retired within 30 years from January 1, 1944. When the bonds of any series are retired, the funds formerly available for their service will be applied pro rata for the amortization of the series still outstanding.
Back interest on all of the dollar bonds, from the time when payments under the 1936 plan ceased up to and including December 31, 1943, will be satisfied by the issuance of new 3½% bonds to an amount equal to one-half of the arrears calculated at the rates of the 1922 contract. These bonds will be issued in denominations of $100, $500, and $1,000. For odd amounts, less than $100, the Government will issue scrip which will be exchangeable, in multiples of $100, for funding bonds with coupons from January 1, 1944 attached. Such exchange, however, must be effected before July 1, 1947.
Outstanding scrip will be paid in cash at 15 percent of the face value at the time when the first interest payment is made under the new plan.
Bondholders who did not receive payments under the 1933 or 1936 plans will receive, in addition to the funding bonds, payments in cash per $1,000 bond as follows: for bonds of Series A,—$200 corresponding to payments not received under the 1933 plan and $165 corresponding to payments not received under the 1936 plan; for bonds of Series C,—$108 corresponding to payments not received under the 1933 plan and $105 corresponding to payments not received under the 1936 plan.
For the payment of the sums referred to in paragraph VI, the Government will use approximately $127,000 now in the hands of the Fiscal Agent75 for the payment of interest on unassented bonds, plus such portion of the first annuity of $800,000 as may be needed for this purpose. In order, however, to provide at least $227,115 for retirement of bonds in the first year, the Central Bank of El Salvador will invest in the purchase of bonds a sum equal to $227,115 less such amount as may be available for amortization from the $800,000 annuity. Bonds so purchased will be regarded as a part of the internal debt and their service will not be charged against the $800,000 annuity.
  1. Copy transmitted to the Department in a letter from Mr. Munro to Mr. Frederick Livesey, dated January 13, 1944. The terms of the understanding herein outlined were, in effect, approved by the Salvadoran Assembly in Decree No. 12 of April 13, 1944, copy and translation of which were transmitted to the Department in despatch No. 1485, April 19, 1944, from San Salvador (816.032/188).
  2. For correspondence concerning the loan contract entered into by the Government of El Salvador and Mr. Minor C. Keith on June 24, 1922, see Foreign Relations, 1922, vol. ii, pp. 885 ff.
  3. The Manufacturers Trust Company, New York City.