Blog Sedes » Bonds for Equity

Out 08 2011

Bonds for Equity

It is well known that in the early 1990s Brazil privatized its State owned steel industry (and other SOEs in other sectors).  What I learned only days ago from a friend of mine who was there at the time is that the share purchases were paid for with Brazilian bonds.

According to my friend this was mandatory – the stipulation of a law enacted in the run-up to the share offering (by auction) itself.  In other words, if you wanted to buy shares, you had to pay for them with bonds.

My brief search into the affair has found only one mention of the form of payment, saying that the Brazilian government “accepted” its own junk bonds without the current market discount (the exception being for external debt, at a 25% discount)*.

I am thus unsure about whether paying with bonds was obligatory or just “acceptable”, and maybe someone can enlighten me.  It seems to me that the first way (obligatory) is not without interest today. 

*Amann, Germano, and Ferraz (2004), Ownership Structure in the Post-privatized Brazilian Steel Industry:  Complexity, Instability and the Lingering Role of the State, p 15. http://www.competition-regulation.org.uk/publications/working_papers/WP75.pdf

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