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Most debt treatments granted by Paris Club creditors provide for the rescheduling of the debt. The repayment of the debt is thus extended over a longer period of time, to deliver cash flow relief to the debtor country.
Once they have fully recovered from their financial distress, some debtor countries may wish to prepay this long term debt ahead of schedule. Their motives may be diverse: active debt management (for instance to reduce specific exchange rate or interest rate exposures), interest rate arbitrage (if the interest rate charged on this debt appears expensive compared to current refinancing rates of the debtor country), political status (not being indebted anymore towards other sovereign states)...
Early repayment is restricted to debtor countries having emerged from the risk of a new Paris Club rescheduling. This assessment requires a consensus of all Paris Club creditors.
To preserve solidarity between Paris Club creditors, the early repayment offer has to be made under the same set of conditions to all Paris Club creditors. Each of them will then decide whether they choose to participate or not in the early repayment. The Paris Club agreement thus only deals with the early repayment offer and its conditions, the repayment itself depends on the choices freely made by each creditor.
Early repayment can be proposed to Paris Club creditors under two frameworks:
1)Par prepayment: the debtor country offers to repay the debt (to interested creditors) at face value;
2)Buyback at market value: the debtor country offers to repay the debt (to interested creditors) at market value. The market value is defined as the Net Present Value (NPV) of the remaining cash flows. The NPV is calculated by discounting the cash flows by a discount rate which is the sum of a risk-free discount rate and a country-risk spread. This country-risk spread shall be market-referenced (based on objective references, like the spread observed on the debtor's sovereign bonds of similar characteristics) and multilaterally agreed by all Paris Club creditors. The market value of a claim can be lower or higher than its face value.
Buyback at market value have been introduced in 2004, giving additional flexibility for Paris club creditors and debtor countries to conduct mutually beneficial operations.
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