August 21, 2012 / 9:03 PM / 5 years ago

Clock ticking on Belize default after missed coupon payment

NEW YORK, Aug 21 (IFR) - The clock is now ticking on a formal default by Belize on its so-called 2029 Superbond should it fail to make an interest payment by September 19.

Standard & Poor's on Tuesday lowered its long- and short-term foreign currency sovereign credit ratings on Belize to "selective default" -- and lowered the 2029 Superbond to "default" -- calling Monday's missed $23 million coupon payment and failure to pay accrued interest a default under its criteria.

The missed payment was not exactly a shock to the market. The government had said in a press release on August 14 that it "cannot afford" the coupon that had increased to 8.5% from 6.0%. The government had also called for a prompt restructuring of the instrument.

This, however, seems unlikely in light of the reaction by creditors to the restructuring proposals set forth by the government earlier this month.

These include a 2% 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% to 2% in 2019 and to 4% in 2026 and has no grace period; or a 3.5% discount bond due 2042 with a five-year grace period. Both discount bonds would involve a 45% principal reduction.

"There is a range of options for the coupon payment," said Carl Ross, managing director of investments at Oppenheimer.

"At one end of the range would be outright repudiation of the debt, and the other end would be for Belize to say, 'oh, we were just joking,' and pay the interest in the grace period. I think the reality is going to be somewhere in between, using the coupon as a sweetener."

A source close to the Belize government indicated that it was unlikely an interest payment would be made by September 19 but said it was still hoped that any restructuring would be completed in 2012.

"This has been the slowest and most preventable train wreck," said international finance professor Arturo Porzecanski, of American University.

"This is a case of unwillingness to pay. Why are they not asking for the rate to go back down to 6.0%? Why doesn't the remedy have anything to do with the problem? It's like you go to the doctor with a toothache and they say we need to take out your heart. It just doesn't make sense. Why the gap? This explains why the bondholders' committee is so shocked. They expected some request for debt service or relief of interest rates, but not what they've outlined."

EXTERNAL SHOCKS

During the 2006-2007 Belize restructuring, the sovereign "was talking about building a cruise ship terminal, among other things, and still didn't do any of that," said Oppenheimer's Ross.

With the low coupons, the government was supposed to be gearing up for the step-up to the higher coupon, he said.

"They experienced external shocks and hurricanes, but so did other Caribbean countries," said Ross. "In that restructuring, they had put out a fairly harsh offer that bondholders were able to improve with the step-up coupon."

That very same step-up coupon is bringing the parties back to the drawing board. The increase from 6.0% to 8.5% adds $14 million per annum to the interest bill.

"The fact that $14 million is almost one percentage point of Belize's GDP is not something to sneeze at. But they've known since 2006 that this day would come," said Porzecanski. "It was made very clear that they must save up for what is coming, to slow down the pace of salary increases in public sector and make additional revenues, not only for this bond, but rising pension costs for civil servants and so on."

The government's decision to nationalize local utilities Belize Telemedia and Belize Electricity has been a point of contention with bondholders and others following the situation. The nationalizations have contributed significantly to the country's liabilities, to the tune of 20% of its GDP, said Ross.

"The government is trying to get the bondholders to forgive enough principal and interest so they will be able to pay for the nationalizations they have undertaken," said Porzecanski. "That's where the money goes, even if they haven't said so. They are reallocating money that they would have paid bondholders. It is reminiscent of Ecuador and Argentina."

The 2029 bonds are currently trading at 34-37 cents on the dollar, suggesting the market is pricing in a scenario in which Belize will improve the terms by a significant amount.

A senior portfolio manager following the matter closely is skeptical about that outcome, worrying that the Belizeans will not improve the terms by much, and in the end the value could end up being 20 cents on the dollar versus 30 cents on the dollar.

After the government announced on August 14 that it would not be able to make the coupon payment, the bonds fell to as low as 18-25 cents on the dollar.

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