Argentina may have staged one of the largest debt exchanges ever last June when it swapped $30.5 billion in bonds. But Brazil completed a smaller, more successful deal on infinitely better terms than those on offer for Argentina’s bondholders.
The Central Bank of Brazil’s par-for-par Brady exchange brought reluctant investors out of the woodwork and improved the sovereign’s yield curve. The deal also helped distance Brazil’s capital markets from those in neighboring Argentina as that country’s fiscal collapse gathered pace.
LatinFinance names Brazil’s $2.15 billion par-for-par Brady exchange, led by Citigroup and Credit Suisse First Boston as sovereign liability management deal of the year.
In March, after two years’ discussion with CSFB, Brazil offered holders of Brady par, discount and debt conversion bonds to exchange their bonds for new global Brazil 8.875%, 2024 bonds plus a cash payment. This structure allowed bondholders to swap their Brady bonds for an equal amount of the new bonds, while the cash payment made up the market value difference between the old Bradys and the new bonds. This was the first Brady exchange with a par-for-par structure. The exchange enabled the Republic of Brazil to retire $1.16 billion in Brady discount bonds, $682 million-worth of Brady par bonds, $261 million in C Bonds and $47 million conversion bonds. The swap freed up $545 million of collateral that backed the Bradys. Subtracting the cash payments, the deal produced net present value savings of $75 million. The deal also as established a new, liquid global benchmark bonds for Brazil.
The exchange targeted banks that still held Brady debt. Mike Corbat, head of emerging market debt capital markets at Citigroup, explains the structure of this swap allowed the original holders of Brazilian Bradys, who had previously been unable to participate in previous Brady exchanges, to get rid of these bonds without taking a loss.
“The Brazil par-for-par was an exception to the trend we have seen lately in exchanges,” says Corbat. “Since the first Brady exchange in Mexico in 1996, countries have had to pay larger premiums to get Brady holders to participate in these exchanges.” This is because many banks that had lent to governments and received Bradys that repackaged their defaulted loans still booked the bonds at par. Selling or swapping them would constitute a capital loss in their portfolios. But the Brazilian swap allowed banks to give up their Bradys without taking an accounting hit.
Rashmini Yogaratnam, head of Latin American debt capital markets at Citigroup, says that because original holders represented 40% of the deal’s participants, they helped convince other bondholders too. “The participants represented a good balance of buy-and-hold investors, which assured other investors that there was a core demand for this issue and helped secure optimal pricing in the market.”
According to Paul Tregidgo, managing director and head of global emerging debt capital markets at CSFB, the swap also improved Brazil’s yield curve. “This issue created a new benchmark security priced just inside the Brazil yield curve which was justified by its subsequent performance,” says Tregidgo.
The success of Brazil’s exchange spurred Mexico to execute a duplicate swap just eight days later, with a $3.3 billion par-for-par Brady exchange led by CSFB and Citigroup. Bondholders swapped their old Bradys for new global 8.125% 2019 bonds and a cash payment. Bondholders offered $2.3 billion in pars and $1 billion in discounts, making this the largest par-for-par Brady exchange ever completed in Latin America.
Mexico’s swap structure is identical to the Brazilian exchange, allowing the sovereign to realize the same benefits. The new bonds created a liquid benchmark for Mexico, generated net present value savings of $115 million and freed up $1.5 billion in collateral minus the cash payments.
In June, Argentina pulled off the largest voluntary debt swap and the largest emerging markets transaction ever with its $30.3 billion exchange led by, among others, CSFB, Goldman Sachs, JP Morgan and Citigroup. The swap enabled Argentina to stave off default by exchanging near-term instruments for longer-dated securities. International investors could swap out of old bonds with maturities from two to 30 years for four new global issues maturing in 2008, 2018 and 2031 with coupon interest rates between seven and 15.99%. The swap provided Argentina with net present value savings of $102 million and a recovery of $700 million in collateral backing long-dated par and discount bonds. But the sovereign paid $137 million in fees to the banks that executed the transaction and added more than $1 billion to its overall debt load.
Although Argentina’s record-breaking swap was doomed six month after it was launched when the government defaulted on its $132 billion debts in December, the transaction was a remarkable operation nonetheless. It was large, complex and executed at a moment of desperate anxiety in the markets.