Worse-Than-Argentina Debt Offer Rejected by Belize Holders
Belize is offering bondholders 20 cents on the dollar in a debt restructuring, worse than what Argentina gave creditors following its 2001 default, according to Bank of Nova Scotia (BNS) and Citigroup Inc.
Investors are wagering that a better offer is coming.
Belize, the Central American nation that’s home to 333,000 people and the largest barrier reef in the Western Hemisphere, missed a $23 million coupon payment yesterday on $544 million of dollar bonds due in 2029. The government is unlikely to make the payment during a 30-day grace period, Finance Secretary Joseph Waight said in an interview.
While the bonds are trading at 34.50 cents on the dollar, Scotiabank says the government’s three proposals to restructure the debt give the securities a net present value of about 20 cents, the least among 16 sovereign debt restructurings since 1998.
Belize’s offer “is not a haircut, it’s a scalping,” said Arturo Porzecanski, a professor of international finance at American University in Washington. “It puts Belize in the same league as the most punishing restructurings in sovereign history.”
The bonds from the country once known as British Honduras traded at almost 50 cents the first week of August, before Prime Minister Dean Barrow said the government couldn’t afford to make the coupon payment. While a restructuring may deprive the $1.4 billion economy of foreign capital, it would let Barrow divert money to cover a budget deficit he said will climb to 2.5 percent of gross domestic product this year from 1.1 percent in 2011.
In response to the missed payment, Standard & Poor’s lowered Belize’s rating to selective default today and said investors were likely to recover 30 percent to 50 percent of the bonds’ face value in a restructuring.
Belize’s debt servicing costs increased after the coupon on the so-called superbond climbed to 8.5 percent in February from 6 percent as part of an accord reached with investors in 2007. Falling oil and tourism revenue added further strains, which may worsen after an agreement is reached with shareholders of nationalized companies Belize Telemedia Ltd. and Belize Electricity Ltd., according to the central bank.
The economy expanded 2 percent in 2011, as tourism and services accounted for 55 percent of GDP. Manufacturing and construction made up 21 percent of the economy, while agriculture and fishing’s contribution fell for a sixth consecutive year, to 11 percent, according to the central bank.
“We simply do not have the capacity to make the payment,” Waight said in a phone interview yesterday from Belmopan, Belize’s capital. “We would like to engage with creditors and say ‘Look, what is your reaction to these scenarios’ and sit down with them to see if we can have constructive discussions leading to a solution.”
The bonds fell 0.25 cent to 34.50 cents today after tumbling as low as 30.5 cents on Aug. 10, the lowest since 2007, when the debt was issued as part of a restructuring, according to data compiled by Bloomberg. The gap between the price and the government’s offers show that bondholders are waging Barrow’s government will sweeten the deal during the grace period to avoid a default, according to Jeremy Brewin, who helps manage $4.7 billion in emerging-market debt at Aviva Investors in London.
Argentina, South America’s second-biggest economy, offered bondholders securities valued at 30 cents on the dollar in a debt exchange in 2005 following its $95 billion default, Scotiabank said, citing data from Moody’s Investors Service. Greece’s 200-billion-euro ($247 billion) debt swap this year, which was the world’s biggest debt restructuring, valued its bonds at 29 cents based on future cash flow, Scotiabank said.
While a restructuring in Belize is needed, the terms the government offered are too harsh, according to AJ Mediratta, a partner at Greylock Capital Management who is leading a group of investors holding about $300 million of the country’s bonds.
“We accept the fact there may be losses involved, but what we don’t accept is a unilateral decision,” Mediratta said in a phone interview from New York. “It is very hard to feel they’ve made the case for a restructuring on par or worse than Greece.”
Two of the three restructuring scenarios the government has proposed call for a 45 percent principal reduction, a lower coupon and a maturity extension to 2042 from 2029. The third option includes the reduction of the 8.5 percent coupon rate to 2 percent with a 15-year principal grace period and a maturity date extension to 2062, the central bank said Aug. 8.
Assuming a yield of 12 percent, the bonds in the government’s offer are worth between 20 cents and 22 cents, according to Nomura Securities International Inc. With a yield of 15 percent, it is no more than 18.33 cents, according to Citigroup.
Belize hired New York-based law firm Cleary Gottlieb Steen & Hamilton LLP to advise the government on its restructuring, Waight said. Cleary Gottlieb aided Argentina in two debt restructurings following its default.
With a restructuring, Belize would have enough resources to survive “for years” without having to borrow from international markets, according to Gorky Urquieta, who helps oversee $15 billion of emerging-market securities at ING Investment Management in Atlanta.
“I don’t know if they count on accessing capital markets in the medium term,” said Urquieta, who has sold his holdings of Belize bonds. “From that perspective, they think it’s better to go for a big reduction in debt service. You probably have the worst combination where you are dealing with the questionable ability and questionable willingness to pay.”
Belize, wedged between Mexico and Guatemala on the Yucatan Peninsula, relies on foreign capital to finance its current account deficit. Argentina has been shut out of the international bond market since its default, as has Ecuador, which stopped payments on its $3.2 billion debt in 2008.
Belize’s government is determined to impose bigger losses on creditors because Barrow wants to court public support by blaming foreign investors for the country’s economic woes, according to Morten Bugge, chief investment officer at Kolding, Denmark-based Global Evolution AS, which oversees $1 billion.
“There might be a little bit of improvement but not to the extent that the 35 cents on the dollar is justified as it is trading right now,” said Bugge, who sold his Belize bond holdings over the past month, in a telephone interview. “They need to treat investors in a more friendly manner, but I very much doubt this is going to happen.”
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