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In their own words. (Martin Schubert)

Jul 1, 1998

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 different.
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 Friedlander?
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 Friedlander?
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.

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