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An all-consuming approach to bonds

In the Middle East, Emirates NBD has announced a unique approach to asset liability management — physically masticating its outstanding bonds. Most issuers would take the traditional approach of simply buying back their debt in the secondary market, or switching bondholders into a new transaction. Not Emirates NBD. The borrower has whipped up a flurry of interest in a controversial plan to simply eat — as in actually swallow — its dollar bonds.

The in a release confirming a previous press release, NBD stated: "We confirm the accuracy of the news" that "Emirates NBD Plans to lunch USD bonds".

“I guess it could work,” said one ALM banker away from the exercise. “I mean, I’m not 100% sure that eating the bonds would necessarily stand up in court as a cancellation. But if it does work it would certainly offer a new cost-effective way of managing redemptions and interest payments.”

Other ALM bankers were concerned that a rush of follow on bond lunches could set ALM fees plummeting.

“Presumably if they’re just going to eat them then they don’t really need us to set up a modified Dutch auction,” said one London-based head of asset liability management. “I supposed we could offer to book a restaurant, or get some condiments or something. If the paper turns out to be pretty tough and chewy they might need people to eat it for them — some of those offering circulars are pretty long after all.”

The idea that ALM bankers could be reduced to eating bond documentation on behalf of issuers was met with mixed reactions. Some bankers saw the development as natural — just one more service in a suite of product offerings banks have had to develop in order to keep market share. Others felt that that it would be somewhat degrading, but those with years of experience were able to rationalize their new role.

“I’ve swallowed worse in my time as an investment banker,” said one.

CDS holders, meanwhile, were similarly sanguine. Whether an issuer eating the bonds could qualify as a default was being hotly debated as this article was written, but most CDS holders are used to disappointment.

“To be honest if a Dutch bank can get a huge bailout to avoid a bond default and I don’t get a penny, then I wouldn’t be that surprised if I get screwed because some borrower scarfed theirs  down with a slice of sourdough and a glass of water,” a CDS holder said.

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