The issuance last week of collateralized Paris Club debt owed by Russia to Germany in a deal known as Aries spurred talk that other debtors may eventually follow suit. "It's definitely a first effort to make this debt market-based," said Jose Barrionuevo, head of Emerging Market strategy at Barclays Capital. Other countries, he added, might be good candidates down the road, but would have to steady their economies first.

Among the Latin American countries that are beholden to members of the Paris Club, the group's Web site has fairly current figures for Ecuador, which owed the Club US$2.7 billion as of January; Dominican Republic (US$1.6 billion); Honduras (US$1.4 billion); and Nicaragua (US$1.6 billion).

The biggest difference between these countries and Russia is the latter's split investment grade/high yield rating, which makes its debt more palatable to the market. The other debtors mentioned above have lower ratings. Ecuador, for instance, is just barely in single-B territory.

As such, any securitization of Paris Club debt for Ecuador and other similarly risky credits would probably need to include the kind of enhancements that were glaringly absent from Aries.

In a flip-flop of the usual case with ABS, the market actually perceived Aries as inferior to Russia's plain vanilla paper. Sized at a total 3 billion and US$2.4 billion, the bonds priced at fat spreads to Russia's benchmark globals. This was essentially because the investors viewed the Paris obligation as subordinated to the other debt. The securitization did not feature any enhancements, such as overcollateralizatoin or subordination.

Moody's Investors Service rated Aries Ba2', two notches below the sovereign, while Standard & Poor's matched the ratings at BB+'. Aries was part of a program that could hit 17 billion.

The Paris Club brings together 19 predominantly wealthy creditor countries. Formed in 1956 to address Argentina, the informal group provides a framework for working out distressed sovereign debt. Since 1983, the Club has worked out about US$421 billion in its agreements.

(with additional reporting from Joy Ferguson)

Copyright 2004 Thomson Media Inc. All Rights Reserved.

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