Brazil Proposes Bond Issues To Restructure Bank Debt
Brazil has offered a five-point proposal to restructure its $50 billion of commercial bank debt, banking sources said.
The plan includes an exchange of debt for 30-year par bonds with a coupon of 5% and collateral not yet detailed.
Also proposed is an exchange of debt for 30-year registered bonds at a discount of 37.5%. These bonds will also be collateralized. The options do not include a buyback of debt at secondary-market prices.
The third proposal consists of bonds for which banks would put up 33% new money. For example, for every $100 of debt, Brazil would receive $33 in new money and the creditor $133 in bonds.
The last two options are both temporary interest-reduction bonds. The first is over 25 years, with a 15-year grace period; the second over 15 years, with 10 years' grace.
Terms on the 15-year bond -- known as "front-loaded interest reduction" -- are five years of rates below the London interbank offered rate, then reverting to a market rate -- 13/16 point over Libor.
Terms on the 25-year bond were not made available but are understood to consist of the same kind of low-start interest payments, the sources said.
Bankers at Lloyds Bank and Midland Bank -- both members of the bank advisory committee -- declined to comment on the proposals. The advisory committee is headed by Citibank.
The two sides started meeting on the restructuring last week. The banks said after the meeting that Brazil's proposals formed a basis for negotiation.
Brazil paid no interest on bank debt between July 1989 and December 1990. Earlier this year, Brazil and the banks reached agreement on treatment of the $8.5 billion in arrears it accumulated in that period.
Cash to Be Paid This Year
It promised to pay $2 billion in cash this year. The remaining $6.5 billion is to be in 10-year bonds, repayment of which will begin after three years. Brazil has paid two installments totaling $1.38 billion.
One banker with exposure to Brazil but not on the advisory committee said the proposal looked worth talking about but he doubted this would be the end of the story.
"There's no way the banks will just accept the first offer put in front of them," he said. "They will probably come back asking for a higher coupon on the par bonds, a lower discount on the discount bonds and better terms on the new money bonds."
One problem, he said, could be that although collateral is promised on the par and discount bonds, the Brazilian proposal is thin on details.
One analyst said the lack of detail on collateral probably means the Brazilians are unsure of how much money they will have available and how much they will need. "If everyone goes for the par bonds," Brazil will fall short, the analyst said. "They will not have enough enhancement money."
Analysts have estimated Brazil could be $2 billion short if it wants to maintain import cover at four months.