Make-Wholes in Sovereign Bonds (Not Sure Why They Are There, but They May Be Free)

50 Pages Posted: 28 Apr 2020 Last revised: 17 Jun 2020

See all articles by G. Mitu Gulati

G. Mitu Gulati

Duke University School of Law

Ugo Panizza

Graduate Institute of International and Development Studies (IHEID) - Department of Economics; CEPR

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Date Written: April 3, 2020

Abstract

Unnoticed in the literature on sovereign bonds, an innovation has been taking place over the past decade and a half. Starting with a single issuance in 2006 by Mexico and two issuances by Brazil in 2007, some issuers have been using “doomsday” or “make whole” call provisions. These are call options set deep out of the money at issuance, and therefore unlikely to be triggered. We report the birth and evolution of the clause over the past fifteen years and ask what drove its application to sovereign bonds. We also estimate its cost for the issuing country. It turns out, at least thus far, that it is free.

Keywords: Make-Whole Call, Doomsday Call, Sovereign Bonds

JEL Classification: F34, H63, K12, K22

Suggested Citation

Gulati, Gaurang Mitu and Panizza, Ugo, Make-Wholes in Sovereign Bonds (Not Sure Why They Are There, but They May Be Free) (April 3, 2020). Duke Law School Public Law & Legal Theory Series No. 2020-22, Available at SSRN: https://ssrn.com/abstract=3567746 or http://dx.doi.org/10.2139/ssrn.3567746

Gaurang Mitu Gulati (Contact Author)

Duke University School of Law ( email )

210 Science Drive
Box 90362
Durham, NC 27708
United States

Ugo Panizza

Graduate Institute of International and Development Studies (IHEID) - Department of Economics ( email )

Geneva Avenue de la Paix 11A
Geneva, 1202
Switzerland

CEPR ( email )

London
United Kingdom

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