FT: BULGARIA TO REVEAL BRADY SWAP RESULT

Views on BG | March 22, 2002, Friday // 00:00

Financial Times
By Arkady Ostrovsky

Bulgaria on Friday is expected to announce the results of its E1bn-E1.2bn ($883m-$1bn) Brady bond swap, which will save the country millions of dollars in debt servicing costs. Bulgaria will exchange its restructured Brady debt for new dollar and euro-denominated bonds.

Bulgaria's total Brady debt is $4.6bn, so only a quarter of this will be swapped for new bonds. The new dollar-denominated bonds will mature in 2015 and will yield 9.1 per cent or 375 basis points over the US treasuries. This compares to the yield of about 9.75 per cent on Bulgaria's Brady bonds. The euro-denominated portion of new debt will mature in 2013 and will be priced to yield 275 basis points over the German bund.

Milen Veltchev, Bulgaria's finance minister, said the swap would reduce the net present value of Bulgaria's debt by between $75m and $100m, and the face value of the debt by about $250m.

Bulgaria is the latest country to exchange its restructured debt, known as Brady bonds, for new international bonds. Similar exchanges were carried out among others by Brazil, Argentina and most recently, Peru. According to JP Morgan's emerging markets bond indices research team, the amount of Brady debt almost halved over the past five years as a result of buy-backs and exchanges. The total outstanding amount of Brady bonds represented in JP Morgan's benchmark EMBI index fell from $121bn at the end of 1995 to just $74.8bn last month. "Bradys are a disappearing breed," said Philip Poole, chief emerging markets economist at ING Barings. Brady bonds were complex instruments originally designed to give creditors a collateral in the form of US Treasuries. "Most investors prefer to buy straight international bonds, rather than something that is a mixture of US Treasuries and emerging markets risk," said Mr Poole. By buying back Brady bonds, or by swapping them into new bonds, countries like Bulgaria can release the collateral in the form of US Treasuries. "For each $100m of Brady bonds backed by US Treasuries, Bulgaria will get back $32m-$33m of the collateral locked in those bonds," Mr Poole said. The debt exchange will also allow Bulgaria to shift its debt from dollars into euros, which fits in with Bulgaria's trade and economy.

Bulgaria's currency is pegged to the euro.

Bulgaria has one of the fastest growing economies in the region. Last year its gross domestic product grew by 4.5 per cent, and this year is expected to grow by about 4 per cent, according to Mr Veltchev, who said Bulgaria could join the EU in 2007-2008.

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