Welcome to the second Restructuring newsletter, 

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Today, we will learn more about: 

• Latin American Debt Crisis and the Brady Plan

• Emerging Markets

• The Generalist – Coatue

Latin American Debt Crisis Summary

The Latin American debt crisis of 1980 was a financial crisis that impacted numerous countries in Latin America and the Caribbean. The crisis was triggered by a combination of factors, such as a sudden rise in interest rates in the United States, a decrease in commodity prices, and poor economic management by several Latin American governments. Consequently, many countries were unable to fulfill their payments on their substantial foreign debts, which had accumulated during the 1970s. This resulted in a debt crisis, with many countries defaulting on their loans and experiencing severe economic challenges. The crisis had a significant impact on the region and resulted in widespread poverty and economic stagnation.

The debt crisis can be easily identified as Mexico's inability to repay its outstanding debt to U.S. commercial banks. To address this, U.S. Treasury Secretary Nicholas Brady allowed countries to exchange their commercial bank loans for bonds backed by U.S. Treasuries. The average write-down was 35 percent, in exchange for risk-free, tradable instruments. These U.S. sovereign debt securities, backed by U.S. Treasury bonds, are referred to as "Brady bonds." Brady bonds are issued when developing countries need to restructure their external commercial bank loans in U.S. dollar denominations. The goal of Brady bonds is to reduce the debt of developing nations. The U.S., IMF, and the World Bank supported the Brady Plan by working with commercial bank creditors.

To provide a brief summary, NPAs (Non-Performing Assets) are loans where interest and principal payments have not been received and are considered "past due." These loans become classified as NPAs when payments have been outstanding for 90+ days. Bonds issued by developing nations convert the NPAs of banks into U.S. treasury-backed tradable financial instruments, allowing the bank to remove them from their balance sheet. Countries that have adopted Brady bonds include Brazil, Costa Rica, Ecuador, Peru, Jordan, Argentina, Nigeria, Uruguay, Poland, Venezuela, Vietnam, and Russia. Today, Brady bonds do not exist in their purest form, but many countries issue similar financial instruments. For example, after Russia's default in March 2022, they will be restructuring and exchanging their old bonds with new Brady bond-like instruments with a longer repayment schedule

To summarize, Brady bonds work by converting NPAs of foreign commercial in a developing nation into equivalent valued bonds backed by the U.S. treasury, in turn, reducing the nation’s debt burden. 

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