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Brady Bonds

Brady Bonds Definition

Brady bonds are Dollar denominated bonds, named after U.S. Treasury Secretary Nicholas Brady Bonds, traded on the international bond market, allowing emerging countries to transform nonperforming debt into Brady bonds. This olan was a voluntary market-based approach, developed in late 1980s, to reduce debt and debt service owed to commercial banks by a number of emerging market countries. Brady bonds were issued by the debtor country in exchange for commercial bank loans (and in some cases unpaid interest). In essence they provided a mechanism by which debtor countries could repackage existing debt. They are dollar denominates, "issued" in teh international markets. The principal amount is usually but not always collateralized by splecially issued U.S. Treasury 30-year zero-coupon bonds purchased by the debtor country using a combinationof IMF, World Bank, and the country's own foreign currency reserves. Interest payments on Brady bonds, in some cases, are quaranteed by securities of at least double-A-rated credit quality held with the New York Federal Reserve Bank. Brady bonds are more tradable then the original bank loans but come in different forms.

Brady Bonds come with a large amount of options complicating the analysis. Brady Bonds are issued to replace existing government debt. The par value of the bonds is below that of the original government debt, but are generally more attractive to investors because of the guarantees attached and the ability to trade the bond on international markets.

The key innovation behind the introduction of Brady Bonds was to allow the commercial banks to exchange their claims on developing countries into tradeable instruments, allowing them to get the debt off their balance sheets. This reduced the concentration risk to these banks.

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