For almost 10 years, C-Bond was the most traded foreign debt security in Brazil, representing approximately 10% of the shares of emerging countries that changed hands daily. As a result, it has become the main measure of country risk, a role played today by the CDS ( Credit Default Swap ).
In order to better understand its importance, a little historical context is needed.
What is the relationship between C-Bond and the foreign debt crisis?
The 1980s were characterized by a series of defaults on foreign debt issued by emerging countries. As a result of the high dollar indebtedness of the Latin American countries and the high increase in interest rates in the United States to control inflation, Mexico was the first to enter into a moratorium (when a country declares non-payment of the debt), with Brazil did the same in 1987.
The process of renegotiating the Brazilian foreign debt took 7 years. In addition to the difficulties in settling the new terms of a large sovereign debt, in order for the Brazilian government to conduct talks with private banks, the US government demanded the consent of the International Monetary Fund (IMF) .
The agency, in turn, defended at the time the implementation of an extremely recessive program. Brazilian authorities were reluctant to adopt it, fearing the political cost that an economic crisis would have in a society that was leaving the military regime.
In 1994, the new conditions were finally agreed:
- A discount on the main price;
- The exchange for six new titles, with a term of up to 30 years.
The negotiations were conducted by Nicholas Brady, former US Treasury secretary, which is why the bonds became known as Brady Bonds.
The C-Bond ( Brazilian Capitalization Bond ) was one of those bonds, representing an amount of US $ 7.4 billion out of a total of US $ 52 billion that the Brazilian government owed to banks , most of them of North American origin.
After the renegotiation was concluded, Brazil reestablished its access to the international financial market. It was with the return of the flow of foreign capital that the country made it possible to use the exchange rate as an anchor in the economy, making it one of the pillars of the Real Plan .
How was C-Bond traded?
The C-Bond had the following characteristics:
- Term:20 years;
- Interest:8% per year (paid semi-annually);
- Grace period:10 years for the beginning of interest payments, which were lower than previous bonds.
With the exchange of roles, the banks began to make money from them. The bond was made available over the counter, where a trader was on the phone negotiating with buyers and sellers.
Its price was in the form of a discount (discount) on its “face value ” (issue value). The size of the discount indicated the degree of confidence of financial agents in the Brazilian government’s ability to honor its commitments. In times of crisis, a C-Bond was quoted at 55.63% of its face value.
Unlike other renegotiated debt securities, which contained a US Treasury bond guarantee, C-Bond had no guarantee. Its attractiveness was precisely due to the discount, since it increased the total profitability (interest and the principal, paid on maturity).
What did the C-Bond rate represent?
In the international market, the risk of a security is defined according to the US Treasury security, the safest asset in the world. Thus, the risk is presented in the form of a “premium”, also called a spread . The bigger it is, the riskier the bond is in relation to the North American paper of the same term, given certain market conditions.
The perception of agents is an extremely important factor. For papers with daily trading, even if a country does not suffer any significant economic impact, the premium is influenced by their greater or lesser disposition in relation to risk.