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Belize set to default on Aug 20 coupon
The Government of Belize has until the close of business today to indicate whether it is going to make good on its threat to withhold a coupon payment due on its $547m bond—a move that analysts say could plunge the Central American country into formal default.
Belize’s Prime Minister Dean Barrow said on Tuesday: “We simply cannot afford this coupon payment given the financing shortfalls and other challenges we face. Our hope, however, is that we can move quickly towards a sensible restructuring of the instrument.” If the government fails to pay the coupon of US$23 million by September 19—30 days from today’s due date—the country will be in formal default.
“The government is playing hardball with creditors,” said Edward Al-Hussainy, an analyst at Moody’s, told the Financial Times. “Saying they 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.” Reuters reported on Friday that Belize's 2029 bond was trading at about 34.00-38.00 after falling to as low as 18-25 on Tuesday, after the government said it was unable to meet its August 20 coupon payment.
The move is seen as adding to the worsening backdrop for the upcoming debt negotiations after the sovereign just last week put out restructuring terms that many see as unacceptable. "They are raising the stakes. We have strived to take a measured approach in responding," AJ Mediratta, a partner at Greylock Capital Management and chairman of the creditor committee, told Reuters.
"The committee wants to be constructive; we control a majority of the 2029 bond, and think their actions are unnecessary and provocative." Whether the announcement is part of the sovereign's negotiating strategy or is the first step towards a default remains unclear. In either case, the move creates considerable friction between the debtor and its creditors as both parties prepare to meet in what is likely to be a protracted restructuring process.
"They are saying they are unable to pay the coupon. To me, that is different from officially saying we are not going to pay. I think they are trying to send the same ongoing signal of economic hardship and low external liquidity," said Carl Ross, managing director of investments at Oppenheimer. "Does it surprise me? Yes. I would have thought they would keep the communication lines open and make this as amicable a restructuring as possible.
“If they default on this coupon, the process moves to a different realm of animosity and ill-will," he said. The government said in a press release Tuesday that it "cannot afford" the coupon that steps up to 8.5 per cent from 6.0 per cent on August 20 and called for a quick restructuring of the instrument. However, this seems unlikely in light of creditors' reaction to the restructuring proposals set forth by the government the week before.
Such scenarios include a 2 per cent par bond maturing in 2062 with a 15-year grace period and no principal reduction, a discount bond due 2042 with a coupon that steps up from 1 per cent to 2 per cent in 2019 and to 4 per cent in 2026 and has no grace period, or a 3.5 per cent discount bond due 2042 with a five-year grace period. Both discount bonds would involve a 45 per cent principal reduction. The bonds fell from the 50s to the 30-35 area in response to the proposals.
"It appears the country isn't receiving good advice. We are continuing to organise ourselves and expect proper discussions to take place. We have asked for information and are waiting to receive it," said Mediratta. In order to maintain a balanced budget, the government needs to have an average interest rate of about 2 per cent, given that it is running a primary surplus of 2 per cent of GDP and has total debt, including contingent liabilities, of around 100 per cent of GDP, Ross said earlier this year.
Indeed, it is those contingent liabilities from disputed claims of former shareholders in nationalised telecoms and electricity companies that are seen as the true wild card and the reason Belize finds itself renegotiating its debt for a second time in just five years. The government has said that those claims will be rolled into any restructuring negotiation, though it is not yet clear if the government can reach a resolution with shareholders in the first place.
"Our fear is that this restructuring exercise, far from being orderly and market-friendly, degenerates into a messy and contentious one," wrote Nomura analyst Boris Segura last Tuesday. "This would bode poorly for Belize's future market access, assuming the authorities want to keep it."
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