Default Concerns Make Belize Bonds Worst in Emerging Markets

Belize’s notes are the worst performers in emerging markets this month as the Central American nation’s budget deficit widens and concerns grow that the government will force holders of $544 million of bonds to take losses in a restructuring.

Belize’s dollar bonds have fallen 2.5 percent this month, the most among 52 emerging-market countries tracked by JPMorgan Chase & Co’s EMBIG index. Brazilian and Indonesian bonds have gained 4.2 percent over the same period. Yields on Belize’s so-called superbond due in 2029 climbed 145 basis points, or 1.45 percentage point, to 20.08 percent this month as the country nears its second restructuring in five years.

Prime Minister Dean Barrow, who campaigned on a promise to restructure the bonds, told lawmakers in June that lowering the debt burden is “unavoidable.” The government faces an Aug. 20 payment of about $25 million and Barrow said Belize’s budget deficit will swell to 2.5 percent of gross domestic product next year from 1.1 percent this year. Investors are starting to “appreciate the difficulty” the government will have in meeting creditor demands, said Stuart Culverhouse, chief economist at Exotix Ltd.

“The market has underpriced the risk until this month,” Culverhouse, who downgraded the bonds from hold to sell on July 5, said in a phone interview from London. “People are now beginning to focus on when the concessions are happening.”

Officials at Belize’s Finance Ministry didn’t return calls seeking comment.

Restructuring ‘Imperative’

The superbond accounts for about half of the nation’s $1.2 billion debt, which has fallen to 81 percent of gross domestic product from 91 percent in 2007, Barrow said. He vowed to pursue more lenient payment terms after interest rates on the notes rose to 8.5 percent this year from 6 percent as part of an accord reached with bondholders in 2007.

“The imperative for restructuring is therefore irresistible,” Barrow said in his budget presentation to Congress on June 29, describing the 8.5 percent coupon as “harrowing.”

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.

“All eyes are on Belize to make the coupon payment,” said AJ Mediratta, a partner at Greylock Capital Management who is leading negotiations for a group of investors holding about $300 million in Belize bonds. “The country has the money to make this coupon payment. We know it is there.”

Economic Growth

While Culverhouse at Exotix also said he expects the government to pay off bondholders, the risk of investor losses in a restructuring outweighs the chance for a profitable settlement “at this juncture,” he said.

The yield on Belize’s 2029 bond climbed one basis point to 20.09 percent today.

Belize’s economy will probably expand 2.8 percent this year after growing 2 percent in 2011 and compared with 4 percent growth for Central America, according to the International Monetary Fund. Barrow said the expansion will be driven by growth in banana and sugarcane output, as well as electricity production and tourism.

An increase in debt service levels combined with declining oil revenue will place a heavy strain on public finances and the economy, the central bank said in a report last month. Belize is still negotiating an agreement with the former owners of the country’s telecommunications and electricity companies, which were nationalized starting in 2009.

The government has made few public comments about the status of its planned restructuring. The delay has surprised investors, said Boris Segura, a Latin America strategist at Nomura Securities International in New York.

“We were expecting some announcement sooner from the government,” Segura said. “It will be very difficult to have this debt restructuring wrapped up by August 20. If you are trying to reach an amicable restructuring, you try to do that from a position of being current on your debt.”

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