Belize’s vow to restructure more than $500 million of dollar debt for the second time in five years has stoked the biggest bond decline in emerging markets. TCW Group Inc. is betting the rout has gone too far.
The yield on the Central American country’s $544 million of notes due in 2029 has surged 235 basis points to 19.4 percent since Jan. 31, when Prime Minister Dean Barrow said he would restructure the securities, without giving more details. The yields have climbed 872 basis points from a year ago and are the highest among 50 nations tracked by JPMorgan Chase & Co.’s EMBIG index. Notes sold by Argentina and Pakistan yield 12.6 percent and 11.8 percent, respectively.
Barrow said he would pursue more lenient terms for the government after the interest rate on the notes rose to 8.5 percent this year from 6 percent as part of an accord reached with bondholders in 2007. TCW says investors are overestimating the losses the country will seek to impose in any new agreement.
“What I think is likely is that they will propose a return to lower coupons and perhaps some maturity extension,” said Marcela Meirelles, a Latin America strategist in Los Angeles at TCW, which oversees $128 billion of assets and bought Belize bonds after the sell-off. “They can engineer a situation in which the debt service is once again manageable.”
Moody’s Investors Service cut Belize’s credit rating for a second time this year on June 1 to Ca, 10 levels below investment grade, citing weak growth in the $1.4 billion tourism-based economy. Moody’s first lowered the rating in February, prompting Barrow to say he “doesn’t give a damn” about ratings companies.
AJ Mediratta, a partner at Greylock Capital Management, is leading a group of investors holding about $300 million in Belize bonds that is seeking to negotiate with the government. He said any proposal shouldn’t result in losses, as measured by net present value calculations, because the country’s debt levels are “stable.”
“We know Belize has challenges like many countries and what we’d like to see is a good-faith process,” Mediratta said in a June 19 interview from New York. “If Belize can restructure in a pragmatic and open way that is friendly to investors and preserves access to the markets, it should only be a benefit for them.”
Finance Secretary Joseph Waight declined to comment on the restructuring, and messages left for officials at the central bank and the government by Bloomberg News weren’t returned. Mark Espat, who heads the government team assembled in March to consider a restructuring, also declined to comment.
Debt Service Levels
An increase in debt service levels is set to combine with declining oil revenue to place a heavy strain on public finances and the economy, the central bank said in a report on its website.
“The government’s latest projections indicate that the country is facing sizeable financing gaps from 2013 onwards,” the report said. “The authorities are in active discussions with multilateral partners, but it is clear that multilateral funds alone will not close these expected shortfalls.”
TCW’s bet may be paying off. Belize’s 2029 bonds have returned about 15 percent since February, compared with 1.6 percent for Latin American debt, according to JPMorgan indexes and data collected by Bloomberg.
Drop in Yield
The yield on the bonds fell 64 basis points today, the most in a month, to 18.72 percent.
Roberto Sanchez-Dahl, who oversees $1.3 billion of emerging-market debt at Federated Investment Management Co., said he sold his Belize debt after the election-season comments because a lack of information led him to prepare for the worst.
“We decided there was not that much upside from there, given the very large political pressure for them to do something about it,” Sanchez-Dahl said in a telephone interview from Pittsburgh. “It looked like it could turn into a very complicated situation there, and under the current market environment, we just didn’t want to have any loose cannons there.”
The International Monetary Fund forecasts Belize’s economy will expand 2.8 percent this year after growing 2 percent in 2011, compared with 4 percent growth for the entire Central America region. About 35 percent of the country’s population lived in a dwelling without a flush toilet or refrigerator, according to a 2010 census.
The restructuring is Belize’s latest effort to control debt-servicing costs. The Central American country consolidated its debt into a so-called superbond in 2007 following higher spending related to tropical storms and hurricanes over the previous decade. At the time, the government said its recovery from storms left it with “heavy external debt obligations.”
In 2007, Belize was spending a quarter of its revenue on interest payments. Public debt outlays equaled 13.6 percent of revenue from April 2011 to March 2012, according to the central bank. The jump in the superbond’s coupon ahead of the elections probably made continued payments a “deal breaker” for the government, said Franco Uccelli, senior economist for Central America and the Caribbean at JPMorgan in Miami.
Belize, which is wedged between Mexico and Guatemala on the Yucatan Peninsula, could expect yields on restructured debt to fall as low as 10 percent, Uccelli said. The country cut its debt-to-GDP ratio to about 84 percent last year from 100 percent in 2005, he said.
“They got a big relief in terms of their debt service burden” in the earlier debt restructuring, Meirelles said. “They don’t need a big haircut.”