The Government of Belize, via a Ministry of Finance press release, announced Tuesday that it is “unable to make an August 20, 2012 coupon payment” on the U.S. Dollar Step-Up Bonds due in 2029.
“The annual interest rate on this bond stepped up earlier this year to 8.5%,” Prime Minister Dean Barrow said. “We simply cannot afford this coupon payment, given the financing shortfalls and other challenges we face.”
The bond represents 46 percent of Belize’s overall recorded public debt, and Barrow said that the only hope is to move “quickly toward a sensible restructuring of the instrument.”
GOB’s announcement comes one week after it publicized its three Indicative Restructuring Scenarios on the Central Bank of Belize’s website.
Each scenario proposed significant reductions in the total amount the bondholders could expect to receive. Two of the options, Scenarios B and C, both recommend a 45 percent principal reduction, as well as reduced coupon rates. Both options also suggest that the maturity date should be extended to 2042. However, only the third option asks for a 5-year principal grace period.
Scenario A does not present any principal reductions. However, it does ask the bondholders to allow the coupon rate to be reduced to 2 percent. In addition, the bondholders are being asked to accept an extension of the maturity date to the year 2062.
S&P lowers Belize’s ratings
Shortly after Tuesday’s announcement, the rating agency, Standard & Poor’s (S&P), via a press release, announced that it has lowered the foreign currency issue rating on “Belize’s US$546.8 million bond … to ‘CC’ from ‘CCC-’.”
This new rating signals to the market that the obligor (the bond issuer that is contractually bound to make all payments on outstanding debt), Belize in this case, is “currently highly vulnerable to nonpayment.”
The agency also lowered to ‘CC’ Belize’s long-term foreign currency sovereign credit rating.
S&P also affirmed the ‘C’ rating given to Belize’s short –term foreign currency and its ‘CCC+/C’ rating for the country’s local currency sovereign credit ratings.
The agency’s foreign currency ratings look at the obligor’s ability to meet its obligations that are denominated in a foreign currency.
The rating agency has indicated that should GOB default on the August 20th coupon payment, and the agency comes to believe that payment will not be made within five business days of said date, it will further reduce Belize’s foreign currency ratings to ‘SD’ (Selective Default).
According to S&P, an ‘SD’ rating is given when an obligor has “selectively defaulted on a specific issue or class of obligations, but it will continue to meet its payment obligations on other issues or classes of obligations … A selective default includes the completion of a distressed exchange offer, whereby one or more financial obligation is either repurchased for an amount of cash or replaced by other instruments having a total value that is less than par.”
Market’s reaction to GOB’s announcement
Earlier this year, creditors representing more than US$200 million of the “super bond” had formed an ad-hoc committee to engage in the talks with the Debt Review Team led by Ambassador Mark Espat.
According to an article in the Financial Times, written by Robin Wigglesworth in London, the default announcement “will complicate restructuring talks with international bondholders that are already under way.”
An analyst at Moody’s rating agency, Edward Al-Hussainy, is quoted in the article as saying, “The government is playing hardball with creditors. Saying they (GOB) won’t make the coupon payment is a pretty aggressive move, and doesn’t give them a lot of time to restructure the bond before it goes into formal default.”
Boris Segura, a strategist with Nomura, told the Times that the real fear is that “this restructuring exercise, far from being orderly and market-friendly, degenerates into a messy and contentious one. This would bode poorly for Belize’s future market access, assuming the authorities want to keep it.”
According to Dr. Bernard Watler, a Public Finance lecturer at the University of Belize, should GOB follow through with the promised default, Belize may very well suffer a “black-eye” to its reputation, which would greatly decrease the country’s access to credit.
Watler said that while institutions such as the Inter-American Development Bank, the World Bank and even the International Monetary Fund (IMF) might still lend to Belize, the level of scrutiny would certainly be amplified.
The Belize Business Bureau, led by Mr. Arturo Lizarraga and managed by Mr. Hipolito Bautista, also discussed an IMF-default scenario. Bautista admonished that should the worse case scenario prevail, and Belize becomes dependent on the IMF’s graces, the institution, which is known for its strictness, would impose severe demands on the Belize government for it to improve its fiscal policies.
The Belize Chamber of Commerce and Industry (B.C.C.I.) also issued a relatively neutral statement Thursday.
The Chamber said, “B.C.C.I. believes that, without exception, debts must be paid and that we must be financially responsible citizens. However, where the economic viability of our country is at stake, the terms of repayment should not be so onerous as to strangle or deter the country’s economic growth.”
B.C.C.I. went on to say that it supports the restructuring “in principle”, with the goal of making the debt repayment more manageable.
The organization also urged the government to use any fiscal relief that is achieved as an opportunity to “introduce programs to stimulate and promote economic growth and investment.”
The Chamber charged government to take the appropriate steps to “trim its own expenditure so that it can introduce balanced budgets and avoid the recurrence of an unsustainable debt burden.”