Martin Schubert, Eurinam
Ask market veterans who really started the secondary market in LDC
debt, and many will likely point to Martin Schubert, chairman of
the European InterAmerican Finance Corp (Eurinam). Previous to
setting up Eurinam in 1983 to swap LDC country debt between banks,
the Brooklyn-born Schubert spent 19 years with Imre Rosenthal, who
ran a factoring firm focusing on the garment industry. There,
Schubert set up the firm’s merchant banking branch, Rosenthal
International, which eventually became a leading syndicator of
euroloans, especially those from Latin America. Below, he
reminisces about some of the early debt-for-debt swaps and how he
teamed up with Victor Segal of Singer and Friedlander.

Who did the first debt-for-debt swaps?
It is a close call between my good friend Giacomo DeFilippis and I,
as to who did the first swap. We did one of the early (debt for
debt) swaps together when he was with Banco Rio. But he should have
been aware that we did one a long time before that. I had lent $8
million to $12 million to Jose Maria Figueras’s family in Costa
Rica, to a private company that they owned way before he was in
politics, with the guarantee of three Costa Rican banks. We
syndicated that when I was president of Rosenthal InternationalWhen
the debt crisis occurred in August 1982, the first thing I did was
call him up, because the prices of the debt were falling, and
propose that we buy the debt back. A lot of the debt was held by
Spanish banks. We proceeded to buy the debt back from all of the
banks. And, of course, I gave the banks other debt. In my opinion,
that was really the origin of the debt swap business. We bought all
the debt back very cheaply and got them out of the guarantees. The
history is simple. He went on to prosper the companies and
obviously went on to become president. God only knows what would
have happened had we not bought the debt. History might have been

How did you make your start in this business?

I was with Rosenthal until December 31, 1982, and had been doing
the first swaps on behalf of Rosenthal. Then I formed my own
company, Eurinam, with the idea of starting a market in third world
debt. I considered that if governments were all going down under,
going into bankruptcy, basically, insolvency, that all the debt has
to be worthless. The banks would be eager to get out of it, and I
would make the market at a price to take it off (their books). And
I knew all the players, because I was syndicating loans. Rosenthal
had become the largest non-bank syndicator of Latin American debt
in those years.Rosenthal is and was a factoring organization in New
York. When I joined them in 1964, it was with the idea of creating
a merchant bank. And I started to buy Mexican debt and sell it-in
those days they used to call this “flog it”-to banks at a price. We
would buy Mexican government debt, (and) private sector debt when
the rates were very high; take it in as a principal and then sell
it. So this was the same business. This was merely buying the debt
at a price and selling it at another price. Banks did not want to
write off their debt. So this was a clear way of banks getting rid
of one debt and taking another debt.

How did you price debt in this market?
We conceived the idea of creating a ratio. And I believe, Jack can
tell me otherwise, but I believe that I made the first prices. And
the prices were made with a great deal of science behind them, the
same way that my old professor at college used to make grades for
tests. He used to put numbers on a step and throw cards against the
steps, and however it came out, well, that was the price. It was
very randomly done. A lot of trial and error.Let’s say, we priced
Mexico at 85, and we priced Argentina at 80, in order to create a
difference to come up to 100. The person giving us at 80 didn’t
want to give us cash, so he gave us other debt, because he wanted
to get out of the private sector debt. So we were getting private
sector Mexican debt for 10 cents, 12 cents, six cents. These were
the original debt-for-debt swaps.

How did you team up with Victor Segal at Singer and

In 1983, I had been on a trip to London, and Victor Segal of Singer
and Friedlander called me. I had been in somebody’s office, a
consortium bank. And Victor said, “I heard you’re buying Latin
American debt at a price. Well, I have a package I’d like to sell.”
I said, “Well, give me a list.” So while I was in the other
person’s office, he gave me a list of a number of names. “What do
you have in mind as to what you would take for this?” I asked. He
gave me an idea. And I proceeded to sell the whole package to the
bank that I was with. About a half an hour later, I called Victor
back, and I said, “The deal is done.” He said, “What’s done?” I
said, “Well, you wanted to sell X amount of dollars of debt, and
you gave me your price. It’s done.” So he said, “So fast?” I said,
“Yeah. Yeah.” In the meantime, of course, I had taken his (debt),
sold it to the guy I was with, and concocted a whole deal. The guy
he was with gave me more debt, which I sold to another person in an
anteroom on the phone. And that’s the way these deals were done.

Are there any particular transactions during that period that
stand out in your mind?

We had been working on a transaction with an airline manufacturer
in Italy, which had a $160 million contract to sell airplanes to
the Venezuelan government. We were mandated by them to sell the
paper. You can imagine, at this time there’s no market for Latin
American debt. The Venezuelan government was going to be paying
them in promissory notes (pagares), maturing in one to five years,
with a down payment of a certain amount, also in notes. So the
airline manufacturer, in order to go through with the contract, had
to find somebody to sell it to.So we had an Italian representative
who brought us the transaction. And we were mandated. We (had)
discovered or created the unique system of trading export paper.
Banks wanted export paper, because export paper was being paid. So
we sold the bank export paper against financial debt and other
debt. We took one US regional bank and sold (them) $38 million of
pagares of the Venezuelan government at a 13% yield and they paid
us in cash and Nicaraguan debt. A 13% yield was a very good yield
for them, and they were getting rid of a bunch of Nicaraguan debt,
which in their minds was worth basically nothing. The Venezuelan
debt paid on time, so they got a very nice yield without having to
take a write-off on the Nicaraguan debt, which was later worth
eight cents or something. In any case, when we did it, it had a
market value, I think, of two cents.The funny story is when we
first opened our offices in New York. Now, we have a $160 million
contract. The first deal I’m seeing and the documentation is
horrendous. It became tremendously burdensome. You’re two people
and you can’t do anything more. Even though the profit is good, you
don’t want to limit yourself. There’s a whole world out there, and
I don’t want to be limited to that deal. So we did the deal using
Chase as the paying and receiving agent. The day of the closing,
the regional bank wants to go to the bank and pay, again, to
receive the notes. The seller, the manufacturer, also wants to go
to the bank and wants to deliver the notes to the bank and receive
payment. So how the hell do I do this? Right? They all go down.
Each side had not seen the other side. They didn’t even know who
the other side was. One’s going down in one limo; the other one’s
going down in another limo. I say to my friend, “Look, let’s take
the subway. We’ll beat them down there.” We get down there first
and we manage by some fate of luck to keep them apart and exchange
everything, because we’re in the middle. And we get paid. And
everything worked out fine. When we finished the deal, I said, “I’m
not going through this again.” And Victor Segal then comes to New
York at the end of 1983 and at the the beginning of 1984, I agreed
to do a joint venture with Singer and Friedlander, where they’d do
the documentation and we’d do the deal-making, and they handle
Europe. We then complete, over a period of two years, the rest of
the contract on a similar basis. In some cases, it actually went to
pension funds, where we conceived of a system where it was going to
be guaranteed by insurance companies.

How easy was it to find banks willing to do deals ?
Everybody was looking to get rid of something. Everybody liked one
country and didn’t like another. And they wanted to avoid a
write-off to their portfolio. They had too much of one thing and
not enough of another, so they could afford to sell one thing and
take on another. Everybody had preferences. They all wanted to get
rid of private sector debt without taking the write-off.

How did the bankers react to these transactions?
First of all, the banks thought I was a vulture. Because remember,
a lot of these loans I had syndicated to them. And here I am buying
it back at a fraction. There was the Forbes article, which said,
“There goes the neighborhood.” And I wrote them a follow-up saying,
“No. The neighborhood’s going to get a lot bigger,” which it did.So
we went along.

What led to the break up of your venture with Singer and

In mid-1991, when the market had completely changed, we decided
that they really didn’t want to be in the gambling arena that this
had turned into, and we decided to continue with the emerging
market trading operation and do other deals. And we severed. We’re
very good friends. And occasionally we do deals together.

Hadn’t the market become less risky?
No, because these (swaps) were structured transactions where we
kept a little bit of the debt that was left over, but they were
structured transactions. To put it in the best way I know how, they
were financial barter transactions. That’s really what it
represented.I think that we created the groundwork for what exists
today. There’s only one sad part of it.

What’s that?
It all could happen again.