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19 Int'l Fin. L. Rev. 17 (2000)
How Ecuador Escaped the Brady Bond Trap

handle is hein.journals/intfinr19 and id is 739 raw text is: How Ecuador escaped the Brady bond trap When Ecuador defaulted on its Brady bonds in August 1999, it entered new territory for a sovereign issuer. More than a year later it seems to have answered many of the questions raised by its attempts to reschedule the debt. Lee C Buchheit of Cleary, Gottlieb, Steen & Hamilton, New York, adviser to the Republic, explains the challenges involved and the legal innovations used to save Ecuador from its default Ever since the first Brady exchange (for Mexico in 1990), the market has wondered what would happen if a further restructuring of Brady bonds became necessary. Brady bonds were, after all, designed by their commercial bank authors to be inviolable in any future sovereign debt workouts. Would it be possible to mobilize the hundreds or thousands of bondholders to accept such a restructuring? Could the sovereign debtor find a way to circumvent the contractual provisions in Brady bonds intended to ensure their exemption from future reschedulings? By what method would the sovereign establish relative value among the different types of Brady bonds with some collateralized and some not; some long-term and others short-to- medium term; some carrying floating rates of The Ecuador exchange offer incorporated several innovative legal features designed to address the unique situation of a country that was, for the second time in five years, approaching its private creditors for a significant reduction in the size of their claims WAIXAAI R PT Pn interest; others with fixed, below-market coupons? Would the prospect of a group of non-participating, holdout creditors scupper the chances for a consensual workout? The inglorious task of answering these questions eventually fell to Ecuador, the first country to attempt a restructuring of Brady bond indebtedness. Ecuador defaulted on both its Brady bond and Eurobond debt (in an aggregate principal amount of $6.46 billion) in mid-1999 following a series of devastating shocks to the Ecuadorian economy. These included damage to coastal infrastructure and agriculture caused by the El Nifio weather phenomenon, very low oil prices in 1998 and early 1999, and a near total collapse of the Ecuadorian banking system. Ecuador's Brady bonds were issued in 1995 and reflected financial terms that were, up to that point, more generous than had been accorded to any other Latin American borrower. Ecuador's discount bond, for example, had been issued at a 45% discount as compared with the customary 35% discount for most previous Brady countries. The Ecuadorian Eurobonds were issued in 1997 in two series: a $350 million fixed-rate bond, scheduled to mature in 2002, and a $150 million floating-rate bond, scheduled to mature in 2004. What started as an economic downturn in Ecuador very quickly took on a political dimension. Five months after the first defaults on Brady bonds, President Jamil Mahuad was deposed in a popular uprising. Following a brief 1,.amhghr 9nnnlt I T_-- .. ;-1 T . .;M•.. D -.4 - ... -9

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