Brazil’s C-Bond is more than just another Brady. It is a landmark in the emerging market asset class. It is the largest, most liquid of all the Bradys. Last year’s trading volume totaled $289 billion. Its launch in 1994 was particularly auspicious, coming in the year the government launched its Real Plan that crushed inflation and marked the beginning of a period of reform and growth. William Rhodes (see page 67) chaired the banking committee, made up of several international banks including Morgan Guaranty, Lloyds, Chase Manhattan and Chemical Bank, which negotiated Brazil’s Brady Deal.
Then in 1997, the government issued a $3 billion, 30-year bond – at the time, the largest global bond issued by a Latin American sovereign – to buy back Bradys in the first of a series of clever liability management deals. Investors complained that Bradys were difficult to price and trade because of their complexity and hybrid nature. Global bonds offer investors better liquidity in exchange for a lower yield to maturity. Collateralized Bradys do not offer pure emerging market exposure because they are backed by US Treasury zero-coupon bonds. By withdrawing its Bradys, Brazil was able to release their collateral and continue building an international yield curve.
That deal exchanged $717 million of par bonds, $1.877 billion in discount bonds and $99 million of C-bonds for new global bonds. The offering also included $750 million in new money. The new bond priced at 395 basis points over US Treasuries and carried a 10.125% coupon and attracted $16 billion in orders. Brazil achieved net present value savings of $208 million and released $610 million of collateral. Brazil reopened the 2027 bond to raise an additional $500 million in early 1998.
Two years later, in a calculated decision to draw a line under the January 1999 devaluation of the real, Armínio Fraga, recently appointed central bank president, embarked on another combined Brady exchange and new money deal just months after Brazil had devalued its currency. The central bank swapped $1 billionworth of Bradys for new five-year bonds raised another $2 billion in new five-year bonds.
Brazil completed yet another jumbo Brady exchange in 2000, when it issued $5.16 billion in new 40-year bonds in exchange for $5.22 billion-worth of Bradys. The bonds carried an 11% coupon and a call option that allows the government to pay down the bonds after the first 15 years. The Bradys had an average maturity of just 7.7 years, and the new 40-year bonds significantly reduced Brazil’s medium-term repayment schedule. The exchange cut the country’s foreign debt stock by $242 million and released $312 million in collateral.