, 11 tweets, 4 min read Read on Twitter
The 3yr Petrobonos issued by Mexico in 1977. Worth $78b 2018 dollars. At maturity to be redeemed for max between bond face value and market value of oil (1000 peso bond linked to 1.95354 barrels). Oil prices increased 43% but investors still made a loss. Why? 1/
They were forced to use the Mexdollar official rate which was kept fixed even though inflation was averaging 20 percent a year. If commodity needs to be converted into local currency and there are price distortions then state-dependency may be gone. 2/
The Brady Plan had bonds with attached warrants linked to GDP (Bulgaria, Costa Rica, Ivory Coast), commodity prices (Mexico, Nigeria, Venezuela), terms of trade (Uruguay, ratio of the price of Uruguay’s main exports wool, beef and rice; and the price of its main import oil). 3/
Uruguay was particularly interesting. Peter Allen in charge of computing Terms of Trade for these warrants from Northern California. Also from the Bay Area, here is that commercial of Tom Brady playing James Bond, because Brady Bonds. via @YouTube 4/
Initially forgotten even for pricing, the oil-linked warrants came alive in the 2000s after detached and as oil prices rose. Backlog of unreconciled trading positions meant that often it was unclear who to pay them to (Venezuela, Nigeria). These payments were also unpopular. 5/
The GDP ones did not fare much better. For example, in Bulgaria the GDP series used to compute payments was discontinued. The Bulgarian government decided then to use a constant-value local currency unit as measure of GDP and the warrant payments were never triggered. 6/
Not Brady, but close, Bosnia and Herzegovina also issued a GDP and (German) inflation linked bond in 1997 plagued with bad data and uncertainty over data revisions. Disagreement between the fiscal agent Societe Generale BT and investors over which years indexation activated. 7/
Recent cases (still restructurings): Argentina, Greece and Ukraine. Argentine case highlights litigation risk. Economic boom and these warrants paid for most years up to 2011. However, lags in payments meant that some payments were due during recession years, bad press. 8/
Base year to compute GDP changed in March 2014 and reduced estimated growth in 2013, just below the trigger for warrant payment. Aurelius, a hedge fund, filed suit in January 2019 in New York arguing statistical manipulation. Details here: dockets.justia.com/docket/new-yor… 9/
Greece capped payments but Ukraine’s design may prove very costly as payments only capped until 2025 (at 1 percent of nominal overall GDP), but not afterwards, all the way to 2040. Some talks of buybacks would also be expensive. 10/
Most of these were part of restructurings. They were sweeteners to the deal and sometimes overlooked (until they were not). Many problems with data, neglected risks, delays in payments. Next, two examples outside of restructuring that worked well: Singapore and Portugal. 11/11
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