March 11 (Bloomberg) -- Grenada called on creditors to restructure $193 million of bonds ahead of a coupon payment this week that the Caribbean island’s government said it can’t afford to make, eight years after its last debt swap.
“The global financial crisis has taken a heavy toll on the country and aggravated the severe debt overhang that continues to weigh down our economy,” Prime Minister Keith Mitchell said in an e-mailed statement on March 8. “It is now time for Grenada to confront the fact that it cannot continue to pay its debts on current terms.”
The island nation, which exports nutmeg and relies on tourism to fuel its $1.4 billion economy, has struggled to lower debt that may reach 109 percent of gross domestic product this year, according to the International Monetary Fund. The government is due to make a coupon payment March 15.
Yields for Grenada’s dollar bonds surged to 17.35 percent on March 8, the highest among 12 Caribbean and Central American nations tracked by JPMorgan Chase & Co.’s CACI index, on investor concerns the nation would default after missing a coupon payment in September. The government paid investors before the end of a grace period. The country’s dollar bonds have lost 5.2 percent over the past year.
Grenada, which was invaded by U.S. forces in 1983, would be the third Caribbean country to restructure its debt this year. Jamaica said on March 1 that about 99% of bondholders agreed to swap 860 billion ($9.1 billion) of higher interest local debt for lower yielding bonds. Belize is finishing negotiations on its second restructuring in five years, after missing a $23 million coupon payment in August 2012.
Marla Dukharan, an analyst with RBC Financial Caribbean Ltd in Trinidad & Tobago, said Grenada’s economy faces weak growth this year after suffering a 5.1 percent drop in tourism and an 82 percent reduction in grants in 2012.
“The prospects for growth revival in Grenada are slim in 2013, and given severe fiscal and liquidity constraints, the proposed debt restructure announced last week seemed inevitable,” Dukharan said today by e-mail. “It would come as no surprise if this proposed restructure involves a haircut.”
While the previous government paid investors within a 30-day grace period, Mitchell, elected on Feb. 19, said Grenada won’t be able to meet its obligation on March 15. The 4.5 percent coupon on the bonds was set to climb to 6 percent in September and reach 9 percent in 2018 as part of a restructuring agreement reached with creditors in 2005.
Struggling to recover from hurricanes and the impact of the global financial crisis, Grenada’s economy contracted an average of 1.2 percent a year from 2008-2012, while the 2005 debt restructuring assumed growth of 4.7 percent, Mitchell said.
Bondholders may have to take a “substantial haircut” as the government struggles to pay even public salaries, said Carl Ross, a managing director at Oppenheimer & Co., a brokerage firm.
“If you’re going to keep restructuring debt, you better get it right the second time,” Ross said in a phone interview from Atlanta.
The southeastern Caribbean nation had been rated CCC+ by Standard & Poor’s, putting the country of 109,000 in the same category as Jamaica and Cyprus.
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