Belize Gains Leverage in Default Talks as Borrowing Not Seen

Belize's Unneeded Bondholders Losing Leverage
Belize Prime Minister Dean Barrow’s government missed a $23 million coupon payment on Aug. 20. Photographer: Thomas Coex/AFP via Getty Images

Belize’s creditors are betting the Central American country will improve its bond restructuring offer in order to maintain access to global debt markets. The government says it doesn’t need them.

Belize’s $1.4 billion economy, which expanded 2 percent in 2011, can go without more borrowing on international credit markets, Prime Minister Dean Barrow said in an Aug. 22 press conference. The country didn’t sell global bonds before 1998 and hasn’t returned to them since a 2007 restructuring.

Barrow’s government, which missed a $23 million coupon payment on Aug. 20, is seeking to reach an accord with creditors before a mission from the International Monetary Fund comes to the country in October as part of an annual review of the economy, according to Mark Espat, who heads the country’s bond restructuring committee. Belize’s ability to survive without global market access may give it an advantage in talks, said Stuart Culverhouse, chief economist at Exotix Ltd.

“I am not sure at the moment the government does care that much about accessing the capital market,” Culverhouse said in an Aug. 30 phone interview from London. “I don’t know if the creditors’ leverage is that strong.”

While both creditors and the Belize officials have expressed the need for “good faith” negotiations, a group representing Belize’s investors says the government hasn’t provided sufficient justification for its default and subsequent restructuring offers, which value the bonds at about 20 cents.

Worst Performer

Belize’s so-called superbond fell 0.05 cent to 35.08 cents today. The gap between the valuation in the government’s restructuring scenarios and the market price show investors expect they will be able to negotiate a better offer, said Carl Ross, who covers Central America and the Caribbean as a managing director at Oppenheimer & Co. in Atlanta.

Belize’s default made the country’s debt the worst performer in emerging markets for a second consecutive month in August. The country’s dollar bonds fell about 24 cents last month, the most among 52 emerging-market countries tracked by JPMorgan Chase & Co’s EMBIG index.

Standard & Poor’s declared Belize’s bonds in default on Aug. 21, when a 30-day grace period on the missed payment began. The country formerly known as British Honduras had been rated as high as “B,” five levels below investment grade, in August 2011.

IMF Review

The investors committee, which says it represents holders of about 60 percent of the outstanding superbond, said in an Aug. 28 statement that the IMF’s last review of the economy, published in December, “did not highlight a debt sustainability concern and the committee is seeking to understand the key assumptions underlying Belize’s decision to default.”

Messages sent to Belize’s Finance Ministry and central bank for comment were responded to by Espat, a former lawmaker who helped lead the 2007 debt restructuring.

Barrow won re-election in March vowing to restructure the bonds after the coupon on the notes jumped to 8.5 percent from 6 percent as part of the agreement reached with creditors in 2007. He said that the government couldn’t afford to continue making payments on the debt even as Belize’s economy heads toward growth of 3 percent in 2012, one percentage point higher than previously forecast.

“We are in a period where parties are basically dancing,” said Ross. “The government is sending the message that they don’t intend to improve terms in a significant way. Creditors are feeling that the government put more burden-sharing on the bond holders.”

Washington Trip

Espat met with officials at the Inter-American Development Bank and IMF in Washington late last month to discuss the default. Belize has received about $100 million in assistance from the IDB over the past five years, according to the Washington-based lender’s webpage. Spokesman Pablo Bachelet said Belize and the IDB are in discussions about “alternatives for support.”

Ross said creditors could try to convince multinational agencies to deny further lending to Belize because they violated debt restructuring principles. He also said the threat of protracted litigation could be sufficient to get Belize to improve its offer.

IDB Votes

The U.S. last year began voting against development loans to Argentina by the IDB and the World Bank as part of an effort to get the South American country to settle with holders of defaulted debt and make payments owed to investors who won arbitration cases.

Beyond global debt markets and the IDB, Belize has access to bilateral financing from Venezuela and Taiwan, Espat said. Taiwan Vice President Wu Den-yih didn’t offer the country additional aid during an August visit, Espat said.

Belize’s government is also working with New York-based law firm Cleary Gottlieb Steen & Hamilton LLC, which advised Argentina on its two debt restructurings following a 2001 default on $95 billion of bonds. Holders of defaulted debt who didn’t participate in two bond restructurings since then haven’t been able to claim Argentine assets abroad in the wake of the country’s financial crisis.

The 61-year-old Barrow said on Aug. 22 that he was certain an agreement could be reached with creditors and that debt relief for Belize is “a sure thing.” The unity of the investors committee gives creditors leverage with the government, said Michael Gerrard, a managing director at BroadSpan Capital LLC, which specializes in Caribbean debt restructurings and is advising the committee.

“Global credit markets happen to be the most costly and the most fickle for a small, emerging economy such as ours,” said Espat. “It is important not to equate a ‘good faith process’ with an outcome that makes either Belize or bondholders cheery.”