Ep 165 - Total Return Swaps
Update: 2025-11-24
Description
Total Return Swaps
There have been reports in the financial press about the use of Total Return Swaps to provide credit to governments (e.g., Angola), often in situations where the government can't otherwise borrow on capital markets. As best we understand them (i.e., badly) these are derivatives backed by sovereign bonds and sometimes cash as collateral. The collateral reduces borrowing costs and the debt stays off books, since the obligation to pay the bonds is contingent (since the bonds are only collateral). We increasingly hear scuttlebutt suggesting these deals are commonplace, and some of our investor friends complain that TRSs effectively subordinate existing creditors. We don't understand TRSs well, and we have questions. Isn't this just garden variety debt dilution? Does it violate the negative pledge clause?
Producer: Leanna Doty
There have been reports in the financial press about the use of Total Return Swaps to provide credit to governments (e.g., Angola), often in situations where the government can't otherwise borrow on capital markets. As best we understand them (i.e., badly) these are derivatives backed by sovereign bonds and sometimes cash as collateral. The collateral reduces borrowing costs and the debt stays off books, since the obligation to pay the bonds is contingent (since the bonds are only collateral). We increasingly hear scuttlebutt suggesting these deals are commonplace, and some of our investor friends complain that TRSs effectively subordinate existing creditors. We don't understand TRSs well, and we have questions. Isn't this just garden variety debt dilution? Does it violate the negative pledge clause?
Producer: Leanna Doty
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