By Andrew Enriquez
Former director and vice president of Bear Sterns & Co.
Belize is currently in danger of re-defaulting on its debt after missing a US$23M interest payment due August 20, 2012 on the $544M USD bond it released on markets just 5 years ago, widely known as the “superbond.” Belize has a 30-day grace period before default is declared, but recent comments by the Finance Secretary suggest that Belize cannot afford to make the payment.
The bond, currently trading at just 38 cents on the dollar, is likely to be further downgraded in the market should the bondholders make a public declaration that there is an “actual and de jure default” and interest arrears are publicly reported. However, under New York State law which governs the bond, a missed interest payment is technically considered a “transfer payment delay” until 90 days have passed. This provides the parties with a sufficient window to reach a compromise.
With the bond trading at around 38 cents on the dollar, Belize is offering bondholders 20 cents on the dollar in a debt restructuring — a worse deal than Argentina gave creditors following its 2002 default. Bondholders are well aware of the debt buyback initiatives that took place in Latin America, including Bolivia’s 1988 buyback of 46% of its defaulted debt with money from international donors and, more recently, Ecuador’s 2008 strategic default (that is, one triggered by unwillingness rather than inability to pay).
The Ecuadorian scheme involved using the threat of default to depress bond prices in the secondary market and then repurchasing the bonds at deeply discounted prices. Ecuador’s buyback was tasked to Banco del Pacifico, a large national bank, which purchased the soon-to-be-defaulted paper at prices just above 20 cents on the dollar.
The latest plan for Greece’s insolvency includes a similar scheme to have the European Financial Stability Facility (EFSF) fund the buyback of a portion of Greece’s debt on the secondary market. The Greek plan employs a tactic known as “selective default” – imposing a loss on some creditors while avoiding the stigma and consequences of an outright default (as seen in countries like Cote d’Ivoire, Eritrea, Haiti, Iraq, Myanmar, North Korea, Palestinian Authority, Sierra Leone, Somalia, Sudan, Syria, and Zimbabwe).
Belize could perhaps engineer its own clever debt restructuring, taking one page from Ecuador and another from Greece.
First: Belize could use some friendly entities or individuals to buy (or who already own) 26% of the debt at current market value. The bond’s collective action clause requires that 75% of bondholders agree before the terms of the loan can be modified. Therefore once the 26% buyback is complete, the remaining non-friendly creditors will no longer have the ability to modify the loan terms without the agreement of Belize’s “friendly entities.”
Second: Because the bond’s exit consent allows for the modification of non-financial matters with the approval of only 50% of bondholders, Belize could approach 55% of the creditors, offering them the full current market value of the loan, thereby selectively defaulting on the remaining 19% (a la Greece). By doing so Belize could make the original bond less attractive for the remaining bondholders that do not agree to a potential exchange.
Bond terms require 25% of creditors to agree to acceleration, a process by which the entire principal amount ($544M) would be called due.
Remaining creditors would be forced to accept whatever deal is offered by Belize, as they would not have the required numbers to accelerate the loan and be made whole. Additionally, because Belize and its “friends” would now have the agreement of more than 75% of the bondholders, they would easily satisfy the collective action clause and be able push through whatever modified terms Belize desired.
Of course, Belize could pursue a more straightforward approach and continue to propose very aggressive restructuring terms – Belize is currently looking for a 45% principal reduction – in hopes that bondholders will eventually cave for fear of getting nothing. This plan would rely heavily on Belize’s ability to convince creditors that acceleration of the loan would not result in them being made whole. This would require Belize, if they have not done so already, to remove all assets from the forum state (in this case New York) so nothing would be available for attachment by a court judgment. With no assets from which they can collect, creditors are more likely to accept even an extremely unfavorable restructuring deal.
Led by Greylock Capital Management, bondholders, whose collective holdings total more than $300M, have formed an ad hoc creditors coordinating committee. They are being advised by BroadSpan Capital, an investment boutique that also advised international creditors to Saint Kitts and Nevis, the Caribbean island federation, in debt restructuring. Belize is advised by White Oak Advisory, and they have also retained Cleary Gottlieb Steen & Hamilton LLP as legal counsel in what will be their second restructuring in 5 years. Both White Oak and Cleary have experience in this area – Cleary advised Argentina in two debt restructurings following its default, and one of the directors at White Oak, Sebastian Espinos, previously worked at Houlihan, Lokey, Howard and Zukin, the firm that advised Belize in its first restructuring.
The creditors committee recently met with the International Monetary Fund (IMF) to request additional details regarding companies Belize has nationalized and the factors contributing to its recent fiscal projections. GE Asset Management was among the group of creditors meeting with the IMF. One might expect GE to be more sympathetic to the struggling sovereign given that it was recently the recipient of some goodwill of its own –a bailout courtesy of the American taxpayers. Unfortunately, it appears the GE Asset Management and other bondholders are reluctant to move forward with a new restructure deal without more detailed information on Belize’s financial situation.
It is reported that Belize also met with the IMF, not to ask for a loan, but to have the IMF review the overall program and hopefully offer support in the form of a guarantee regarding the country’s future debt sustainability. Undoubtedly, it is Belize’s intent that the involvement of a multilateral institution like the IMF will bolster creditor confidence in the debt restructuring negotiations.
The situation is further complicated by the fact that Belize has additional liabilities (around $300M) in the form of compensation owed to the shareholders of Belize’s compulsorily-nationalized electricity and telecommunications companies. While some progress has been made with Fortis, former 70% shareholder of Belize Electricity, negotiations with former shareholders of Belize Telemedia (currently advised by New State) have been less successful.
Even if the shareholders and Belize were to settle on a number midway between what each side contends the company is worth as much as 20% of Belize’s GDP would be added to its debt. Though the settlement of these claims as part of the debt restructuring would be beneficial for future financial stability, it does not appear that Belize’s advisors are making the claims a priority. Lee Buchheit, a partner at Cleary Gottlieb, has said, “A superbond restructuring is not contingent on settlement of the compensation issues.”
As restructuring negotiations between Belize and its bondholders play out on the international stage, one is reminded of the Battle of St. George’s Caye. On September 10, 1798, a small group of Baymen, the first European settlers in Belize, and their African slaves defeated Spanish forces attempting to assert claim to Belize. In less than two weeks, Belizeans will commemorate this historic day. As the celebrations carry on and Belize is once again threatened by a body larger and more powerful than itself, one cannot help but wonder whether this tiny country will summon the strength to win another battle.
Andrew Enriquez is a Belizean and former director and vice president of Bear Sterns & Co., the investment bank which was underwriter for the Government of Belize’s first bond offering, though he was not involved in the handling of that transaction.