LONDON: J.P. Morgan’s prominent bond index division has made a key rule change that could pave the way for some of the world’s poorest countries struggling with the COVID-19 pandemic to receive Brady bond-style debt relief.
The bank’s index arm said that from the end of next month “credit enhanced” bonds would become eligible for all its major emerging markets benchmarks. The indexes are tracked by hundreds of billions of dollars of investment cash globally.
“Once the rule goes into effect, debt instruments with credit enhancements in the form of (but not limited to) third-party guarantees from multilaterals, governments, banks, insurers, private creditors, etc. will be eligible for index inclusion, provided the extent of the guarantee is less than 50% of the debt obligation,” a J.P. Morgan note dated Sept 18 said.
The structures being discussed to help lesser developed countries cope with the economic fallout from the COVID crisis include multilateral guarantees on all or a portion of their bonds, or linking them to high quality sovereign collateral such as U.S. government bonds.
“The latter scenario offers many parallels to the circumstances dating back to the origin of the EM sovereign debt through Brady loans and the launch of the EMBI in the 1990s,” J.P. Morgan added.
J.P. Morgan also made a number of other changes, including keeping bonds in its indexes until six months before they mature rather than 13 months previously.
Serbia remained on track to achieving index eligibility but would remain on ‘Index Watch’ until January 2021, it added.
India is set to have to wait longer for inclusion, though, after investors surveyed by the bank cited ongoing issues with custody and settlement of bonds, legacy trading and other operational hurdles in the country.
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