Markets react badly as Belize presses bid to renegotiate debt
BELMOPAN, Belize, Thursday, August 16, 2012 – On Tuesday, the Belize government announced that it would be unable to make next Monday’s (August 20) US$23 million coupon payment on its US dollar US$546.8 million so called “Step-Up Bonds” due 2029.
This has set up a potential default if the country is not able to restructure its debt and pay bondholders within 30 days of August 20.
This news was met swiftly with a ratings downgrade by Standard & Poors (S&P), which lowered its long-term foreign currency sovereign credit rating on Belize to 'CC' from 'CCC-'.
"Under our criteria, either a missed payment or an exchange that we view as distressed constitutes a default," said S&P credit analyst Kelli Bissett.
This move by the ratings agency follows rumbles of disquiet that started up last week when the Central Bank of Belize posted to its website a proposed a restructuring of the bond that would discount its value and reduce its interest rate.
Citigroup analysts reportedly described Belize's announcement as a "threat of a credit event rather than a willingness to negotiate," adding that it would not be surprising if the government does not pay the 8.5% rate should it fail to reach an agreement with creditors by then.
In June, Prime Minister Dean Barrow indicated that the government wished to cut a deal with creditors before payment is on the 2029 bonds on August 20, which steps up to 8.5% interest from 6.0%.
This has since caused great concern among the bonds’ major holders. An ad-hoc committee made up of holders of more than US$200m of the 2029 bonds has been resisting the Belizean government’s current restructuring attempts.
In commenting on the matter, AJ Mediratta, a partner at Greylock Capital Management and chairman of the ad-hoc committee of holders of the 2029s formed to engage the government said: "They simply haven't made a case for a restructuring of this magnitude, based on the information they have shared with us. They are talking about restructuring terms that are worse than Greece."
The alternatives that Belize has put on the table consist of three restructuring proposals with holders of its 2029s.
These include a 2% par bond maturing in 2062 with a 15-year grace period and no principal reduction, a discount bond due 2042 with a coupon that steps up from 1% to 2% in 2019 and to 4% in 2026 and has no grace period, or a 3.5% discount bond due 2042 with a five-year grace period. Both discount bonds would involve a 45% principal reduction.
Under these scenarios, Citigroup analysts value the 2029s as low as 20, a considerable drop form the low 50s seen in the secondary market prior to the government's announcement.
We are sympathetic, but this is also the most organized and unified group of bondholders that has been involved in a recent sovereign debt restructuring," said Mediratta.
"We expect to have a proper and good faith negotiation based upon ability to pay."
“The Step-Up Bond alone represents approximately one-half of Belize’s total recorded public indebtedness,” has said Barrow. “The annual interest rate on this bond stepped up earlier this year to 8.5%. We simply cannot afford this coupon payment given the financing shortfalls and other challenges we face. Our hope, however, is that we can move quickly toward a sensible restructuring of the instrument.”