What is a Brady Bond?
The Brady Plan, as originally announced by former U.S. Treasury Secretary Nicholas F. Brady, contemplated the exchange of commercial bank loans for collateralized debt securities as part of an internationally supported sovereign debt restructuring. Many so-called Brady bonds conform to these original characteristics. Other debt instruments, also known generically as Brady bonds, were issued as part of later sovereign debt restructurings which did not adhere strictly to the originally envisioned model. It is important to understand that it was U.S. policy to encourage a somewhat adhoc evolution of sovereign debt restructurings so that they included an increasingly diversified menu of options that would make such restructurings attractive to the commercial banking community. Accordingly, the terms Brady Plan and Brady bond are without any precise legal meaning and, in EMTA’s view, the term Brady bond properly refers simply to debt securities issued as part of a Brady Plan restructuring o
Brady bonds are denominated bonds created with a United States dollar value and supported by U.S. Treasury zero-coupon bonds. Named for U.S. Treasury Secretary Nicholas Brady, the main purpose of the bonds was to reduce the amount of international debt held by several countries, most notably countries located in Latin and South America. To this end, the Brady bond was to address the incidence of loan defaulting that had become an all too common phenomenon during the decade of the 1980’s. The emergence of the Brady Bond occurred in 1989. In theory, the idea was to convert previous bonds issued by Latin American countries into new bonds. The process would essentially eliminate the default on older bonds and loans, and allow the countries to create new bonds to cover the outstanding principal of a new loan. Occasionally, the new Brady bond would also cover the unpaid interest as well. Because the new bonds were considered to be tradable on the international market, and due to the collater
