The demise of Brady bonds, which introduced the world to tradable emerging market debt, confirms the coming-of-age of some of their Latin American issuers, investors and bankers say.
Mexico, Brazil, Venezuela and other countries began selling the bonds to restructure unaffordable mountains of debt accumulated during the 1980s and 1990s. Now, with their economies booming and foreign investors flooding into their markets, governments are trying to banish the stain from their balance sheets.
"From the sovereign perspective it is a big deal because it's a hang over from a time when they didn't service their debt. It's a case where you can erase the public record of that moment," John Carlson, a fund manager at Fidelity told Emerging Markets.
The buy-backs announced last week may also give investors access to higher yielding local currency bonds if governments choose to reissue part of the debt. Brady bonds are backed by zero-coupon 30-year U.S. Treasuries and can also carry interest guarantees.
"It's actually a move which releases those treasury bonds but it also increases the yield for the investor," said Jerome Booth of Ashmore Investment Management.
Mexico became the first country to retire all of its Brady debt in 2003. Brazil said last week it will buy back its remaining $6.6 billion and Venezuela is starting a program to purchase $3.9 billion of its outstanding bonds.
"It's obviously the end of an era, it's an era that a lot of governments particularly in Brazil want to forget. It's an era of failure, it's something they want to put behind them," said a senior manager at a bank with extensive Latin American operations.
Separately, the Emerging Markets Traders Association said last week that emerging markets debt trading volumes soared to $1.378 trillion in 2005, the highest since just before the Russian default of 1998. The level represents an increase of 18 percent from the previous year but is likely to decline in 2006 as governments cut back issuance.
"The same bond is going to have to change hands a lot times this year if we're going to see trade volumes match 2005," remarked EMTA executive director Michael Chamberlain.