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Sovereign Bonds: Argentina tries an innovative solution

For several weeks following the collapse in Asian financial markets in October, emerging market borrowers from around the world were, with a few minor exceptions, shut out of the primary debt markets. But frequent issuers can stay out of the markets for only so long.

Some may follow the lead of Argentina which had an unfulfilled 1997 borrowing requirement in December and also wanted to re-establish its market access in preparation for a busy funding programme in the first quarter of this year.

Argentina eventually adopted a mechanism, spread adjusted notes, that has been used only once before: by Merrill Lynch in 1990 when borrowing was very difficult for brokerage firms following the collapse of Drexel Burnham Lambert. The deal gives confidence to investors by allowing the spread over the coupon of the reference treasury security, in this case the 5.75% notes due in November 2002, to be re-set using an auction mechanism, six months after launch, then 12 months after launch and annually thereafter.

At each auction holders of bonds and new investors can submit bids for bonds, and the spread will be set at the lowest level that clears the whole $500 million amount.

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