A Primer on Sovereign Debt Buybacks and Swaps, Issues 2007-2058
International Monetary Fund, Mar 1, 2007 - Debts, Public - 49 pages
This paper sets forth some basic principles that could help debt managers in emerging market and other countries to plan and implement sovereign debt buyback and swap operations. It discusses the macroeconomic context in which buybacks and swaps are undertaken, the objectives of buybacks and swaps, the analytical framework for deciding whether to undertake a particular buyback or swap operation and for selecting among alternative operations, and some key issues in the determination of the strategy for executing buybacks and swaps. The focus is on developing the analytical framework for evaluating sovereign debt buyback and swap operations, since very little work has been done in this area. In this regard, the paper presents a step-wise decision-making procedure, in which discounted cash flow analysis and the use of strategic benchmarks for the debt play central roles.
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Analytical Framework for Selecting Buybacks and Swaps
Elements of Buyback and Swap Strategy
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advantage and/or capital market asset-liability management benefits bond market bond price Brady bonds buyback or swap buyback program buybacks and swaps call option callable bond capital market development cash buyback cash flows changes in interest convexity coupon rate currency composition debt management operations debt service costs debt service payments debt swap develop domestic capital discount rate domestic bond domestic capital markets domestic currency debt domestic debt emerging market countries equation face value fixing period floating rate foreign currency debt funds impact intended objective interest and exchange interest costs interest rate international capital markets investors issuer liability management liquidity risk Macaulay duration macroeconomic market price market value old bond opportunity cost percent premium present value rate debt rate swap re-opening re-purchase price risk and/or capital rollover risk secondary market Sovereign Debt Management strategic benchmarks swap operation target trade-off transactions costs undertaken USS million yield curve yield to maturity