Prefer to Defer: Has the Time for 'Bendybonds' Finally Come?

Abstract

Notes the deep theoretical justification for state-contingent debt instruments, and the extensive real-world corporate use of contractual terms for limited cashflow deferral (ie “PIKs and toggles”, “hybrids”). Explains why past attempts to use contingent instruments for sovereigns have failed to gain market acceptance, noting issues such as lack of analytical tractability, absence of pricing metrics, and failure to fit the needs of fixed income investors by falling outside of key fixed-income bond indices. Proposes a specific form of flexible coupon and principal terms that are appropriate for sovereign bonds, and considers the conditions under which these could be invoked while balancing the interests of creditors and debtors. Argues that these contractual terms address the flaws of past instruments and could follow the ICMA CACs into widespread adoption, dovetailing naturally with the goals of the Debt Service Suspension Initiative.