Brady Bond
Brady Bonds are US dollar denominated bonds that were mainly issued by Latin American debtor countries in the 1980s. Your name is derived from the former US Treasury Secretary Nicholas F. Brady . The overall concept is known as the Brady Plan .
history
After many developing countries , especially Latin American developing countries, were no longer able to service their foreign debts in the 1980s (see Latin American debt crisis ), the Brady Bonds instrument was created in March 1989 to convert these loan debts (sometimes at a discount; see types ) into tradable bonds (a type of loan securitization), which in turn were usually - though not always - secured by US Treasury zero coupon bonds (i.e. without coupon ). The acquisition of these zero-coupon bonds by the respective debtor countries took place using funds from the International Monetary Fund , the World Bank and the countries' own foreign exchange reserves. This collateralization of the Brady Bonds enabled them to be brought to the market. The Brady Bonds had their own coupon with different interest rate options (fixed rate, variable rate, step-up, etc.) and a term of between 10 and 30 years.
At that time, the market for government debt was still relatively small and illiquid. The standardization of the debts of countries with poor credit ratings made it easier to set risk premiums and to trade bonds. Because the Brady Bonds were secured, they became more valuable to the creditors (especially commercial banks) than the original debt. Due to the tradability, the banks were able to get the debts out of their balance sheets (possibly through sale) and thus to reduce the cluster risk in these markets.
The following countries took part in the first round of the Brady Bond issue:
- Argentina
- Brazil
- Bulgaria
- Costa Rica
- Dominican Republic
- Ecuador
- Mexico
- Morocco
- Nigeria
- Philippines
- Poland
- Uruguay .
Types
There are two main types of Brady Bonds:
- Par bonds : these were issued for the same nominal amount as the original loan, but the coupon of these bonds was below the usual market interest rate; capital claims and interest payments were usually guaranteed.
- Discount bonds : these were issued with a discount on the original loan amount, but the coupon had a normal market interest rate; capital claims and interest payments were usually guaranteed.
With these types of Brady Bonds, the creditors granted a haircut in some form , be it through a discount on the nominal amount or through a lower interest rate.
Other, less common types were: front-loaded interest-reduction bonds (FLIRB), new-money bonds , debt-conversion bonds (DCB), and past-due interest bonds (PDI).
Current status
Although the Brady Bond restructuring process was completed in the 1990s, many of the innovations it introduced (e.g., stepped coupons or par or discount options) were later used in other government debt rescheduling negotiations been, so z. B. in Russia or Ecuador . In 1999, Ecuador was the first country that could no longer service the actual Brady Bonds. Mexico, on the other hand, became the first country to fully repay its Brady Bond debt in 2003.