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April 2008 | ifr special report | 9 NON-CORE BOND MARKETS ROUNDTABLE


happening in some of the non- convertible markets, which may make it very difficult to actually pay back according to bond terms.


Moti Jungreis: I am not speaking as a retail investor or an institutional investor, but if I was a buyer, I would probably prefer to buy the NDF deals rather than the fully convertible deals. First of all, you always know you are getting dollars back, you don’t have to cross spreads getting in and getting out on the FX market, because, generally speaking, par- ticularly if you hold to maturity, you are getting your coupons and they are all set according to two pages. So, personally, I like the NDF markets. I know that most people prefer to see a convertible market as it shows that a market is developed, but, as we have seen in Brazil, it does not really matter. The demand is there, even if it is an NDF market.


Isabelle Laurent: But that works until it does not work. If you have a moratorium, you cannot always see what the FX rate is. Much of the NDF market then breaks down, as we saw in Russia during the 1998 crisis. We had personal experience of having


put out synthetic bonds, and the EBRD is obviously in a privileged position with preferred creditor status in Russia that was recognised during the Russian crisis. But, actually, it does not necessarily extend to paying agents and trustees and various other things, and it is not automatic that you can find an FX rate at which you can pay people back. So it is not an easy situation. It depends on exactly what the legal situation is at the time.


Holger Kron: What I would add is that, due to the structure, you are bound to the structuring house. So, as an investor, you have a direct exposure to the lead manager, as you do to the credit, which is something about which you might not be aware. So, you are actually adding more credit exposure to the bond that you do not necessarily see as an investor. For example, you think you are exposed to the EIB, but in the end, in the background, you have exposure to the arranger regarding payment. In the Russia crisis we had people suing


or going to court to get back into the money flow, and they had to wait five or six years until they could get to their


Paul Johnson, RBC Capital Markets; Horst Seissinger, KfW


money. They were frozen in Russia in S accounts, and you had to go to court to get your money back. It became a really complicated matter to exit, to execute Plan B, and it did not happen until long after the maturity of the bonds.





In a moratorium, you quite often find that


the risks you thought you were buying actually have a whole host of other things attached to them.


synthetic looks easier, because you are accessing it from outside and you can do it through Euroclear/Clearstream and you are not dealing with the domestic infra- structure, but in a moratorium, you quite often find that the risks you thought you were buying actually have a whole host of other things attached to them.


Alexander Liebethal, KfW: When it comes to illiquidity, is there a difference in the current environment?


Isabelle Laurent: It also depends where the NDF behind it is being played out. If it is just international players playing with each other, then that works: but if one of them is playing in the domestic market where NDFs are deemed gambling contracts, the whole pack of cards falls down, which again was another thing that happened during the Russia crisis. So, many of these contracts were not recognised, and so many people thought that they had a hedge which they no longer had. There are many per- mutations, and in many markets





Holger Kron: It is really depends on the instrument of choice. But the question really arises if markets turn sour: let’s be honest, if Turkey turned sour, you’d have a problem with your Turkish lira- denominated deal. So, this is an extra risk you buy. Does it really make a big difference once the country runs into a problem? I do not know. In the end, both sorts of exposure are the same: you are pretty much on the wrong side in both cases. The truth probably lies somewhere in between. You are probably worse off with the structured bond because you have added another risk, but in the effective flow of money afterwards, you are fully exposed to the currency devaluation, and you have to wait to get your money out, like in the case of Russia, which does not necessarily have to happen, but did happen on those rouble-linked bonds.


Sjaak-Jan Baars: We have decided to avoid issuing NDF to retail clients because


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