Belize’s dollar bonds are the “worst performers in emerging markets” in the month of July, a Bloomberg article, written by Eric Sabo and Adam Williams on Tuesday, said.
The article attributed the bonds’ decline of 2.5%—“the most among 52 emerging-market countries tracked by JP Morgan Chase & Co’s EMBIG index”—to Belize’s widening budget deficit; but, more importantly, it pointed to the growing concerns surrounding the Government of Belize (GOB)’s move to “force holders of (US)$544 million of bonds to take losses in a restructuring.”
According to Bloomberg, investors’ growing fears regarding the so-called “superbond” and its second restructuring within a five-year period has increased the bond’s Yield to Maturity (YTM) rate by 1.45 percentage point (or 145 basis points) to 20.08 percent.
A good way to explain the relationship between the bond’s declining price and its climbing yield could be found in a common real estate analogy.
If someone purchased a house for $80,000 and then rents the house to someone for $400 per month, that landlord – without taking into account any other expenses – would receive an annual total of $4,800 from his tenant. That would represent a yield of 6 percent per annum.
However, if tough economic times were to hit and the house owner becomes concerned over the economic uncertainties, he may put the house up for sale; and because of the recession, he may be forced to undervalue the home and sell at say $40,000.
The new owner, however, does not evict the tenant or change the monthly rent of $400. Therefore, the new owner, who took a huge risk buying a house during recessionary times, is able to get yields of 12 percent once he is able to maintain the renting arrangements, because the house was traded at a discount.
When it comes to bonds, the fundamental principal remains the same. Bond yields are calculated by dividing the amount paid annually by bond price. For example, a 6 percent, 10-year bond with a price of $1,000 would pay $60.00 annually. If the bond’s price falls to $900, the percentage amount – which is generally fixed – would remain the same for the original bondholder. If, however, the bond is sold at its new price, the new holder will obtain the higher yield of 6.67 percent.
Regarding the restructuring’s influence on the bond’s performance, Sabo and Williams wrote: “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 (US) $25 million and Barrow said Belize’s budget deficit will swell 2.5 percent of gross domestic product next year.”
The article also quoted Stuart Culverhouse, the chief economist at Exotix Ltd., a market investment-banking boutique (A small investment firm).
According to Bloomberg, Culverhouse said he expects the Belize government to honour its debt obligation; however, he also stated that the “risk of investor losses in a restructuring outweighs the chance for a profitable settlement ‘at this juncture.’”
In June this year, another Bloomberg article, entitled “World’s Highest Debt Yields Signal Buy Belize Bonds to TCW,” delivered a slightly different message.
The article reported that Marcela Meireless, of TCW (Trust Company of the West), an investment-counseling firm, said investors are overestimating the losses that would be imposed in any new agreement.
“What I think is likely is that they will propose a return to lower coupons and perhaps some maturity extension,” Meirelles reportedly said. “They can engineer a situation in which the debt service is once again manageable.”
This earlier article also said, “TCW’s bet may be paying off. [Because] Belize’s 2029 bonds have returned 15 percent since February, compared with 1.6 percent for Latin American debt, according to JP Morgan indexes and data collected by Bloomberg.”
The June 21st article also quoted Roberto Sanchez-Dahl of the Federal Investment Management Co. as saying that he sold “his Belize debt after the election-season comments because the lack of information led him to prepare for the worst.”
While speculations are rampant and the bond’s performance worsening, it is important to note that no local or international media house has been successful at getting any official comments on the status of the bond restructuring negotiations from officials at Belize’s Finance Ministry or from the bond re-negotiation team led by Ambassador Mark Espat.