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Brazil goes off on a CACs tangent

Brazil's decision to use 85% collective action clauses in its recent highly successful bond issue has raised questions about slightly off-colour investor pressure. What's more, the republic may have made it harder for itself to handle a restructuring should one be needed.

BRAZIL'S $1 BILLION BOND issue at the end of April took the markets by storm. The timing and the pricing were nigh-on perfect: the most difficult part of the deal was deciding how many bonds each of the 430 participants in the over-$7 billion order book was going to get. So it was with some surprise that Euromoney picked up the telephone the following morning only to hear a string of fluent invective aimed at Brazil and its advisers. "Testicular weakness" was one of the more memorable phrases used.

The caller was from the official sector, but was not part of some zealous minority at the IMF. In fact, many private-sector observers took a similar view.

The problem was simple: why had Brazil issued bonds with 85% collective action clauses, or CACs? Everybody had assumed, before Brazil came to market, that not only were CACs here to stay but that the market had standardized on a 75% threshold of bondholders needed to change the payment terms on any bond. After all, that's what Mexico, the trailblazer, had done; that's what Uruguay had put into its own exchange offer; and that's what the G7 countries had said they would do in their own issuance.

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