Exercise of redemption option may hurt investment houses
Two Ecuador-linked credit derivatives sold by Dresdner Kleinwort Benson and JP Morgan will be called next week and could lose their entire value, depending on the value of a group of Ecuador Brady bonds. Ecuador last month said it would miss a payment on about US$6 billion of Brady bonds. That has triggered calls in at least three credit-linked notes, including two announced yesterday. Dresdner Kleinwort Benson and Morgan sold the derivatives in 1996 and 1997 through two issues totalling 250 million deutschemarks (about HK$1.05 billion). The derivatives included provisions allowing early redemption if Ecuador defaulted on its Brady bonds or eurobonds.