by The Armchair Geek

Created on: October 06, 2007

A Brady bond is a bond issued by a Latin American/developing country as part of a debt-relief program. These bonds are issued to creditor commercial banks in exchange for non-performing loans owed by a debtor government. This exchange involves a restructuring of the defaulted bank loans, along with a reduction in that debt.

They were created in 1989 as part of an effort to help Latin American countries make good on defaulted loans. This initiative involved restructuring of non-performing bank loans.

The debtor governments issue bonds that come with certain guarantees, and these are accepted by the creditor banks in lieu of the defaulted loans. Brady bonds are generally collateralized through the purchase of U.S. zero-coupon bonds that have the same maturity as the bonds.

How they work
*The debtor government negotiates with the creditor bank to accept a package of Brady Bonds in exchange for the defaulted loans. The loan principal is generally collateralized with the purchase of US Treasury zero-coupon bonds
*The creditor bank selects from one of the many Brady bond structures.
*Once the Bank accepts the exchange, the bonds are issued, and the debtor government purchases U.S. zero-coupon bonds, which are held in escrow by Federal Reserve. The newly issued bonds will then begin to be traded in the secondary market.

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