August 10, 2012 / 6:13 PM / 6 years ago

Bondholders wary of Belize's bid to renegotiate debt

Aug 10 (IFR) - Markets have reacted negatively to Belize’s indicative restructuring proposals, published on the central bank website this week, with some predicting a protracted negotiation process unlikely to be completed before the Central American country’s next coupon payment is due August 20.

Given that looming deadline, and the less than favorable terms, Citigroup analysts describe Belize’s announcement as a “threat of a credit event rather than a willingness to negotiate,” adding that it would not be surprising if the government does not pay the 8.5% rate should it fail to reach an agreement with creditors by then.

In his budget speech for fiscal year 2012-13, Prime Minister Dean Barrow said the government had made room for overall debt-service payments at BZ$200.7 (US$83m), of which BZ$174.5m is tied to external debt. However, it had been assumed that the government wished to cut a deal with creditors before payment on the 2029 bond on August 20, when it steps up to 8.5% from 6.0%.

“The committee will convene to discuss a response, but we are not taking the indicative scenarios very seriously,” said AJ Mediratta, a partner at Greylock Capital Management and chairman of the ad-hoc committee of holders of the 2029s formed to engage the government.

“They simply haven’t made a case for a restructuring of this magnitude, based on the information they have shared with us. They are talking about restructuring terms that are worse than Greece.”

Belize wants to discuss three restructuring proposals with holders of its 2029s, the so-called superbond, so that can it “close the financing gaps facing the country in a sustainable manner.”

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.

Under these scenarios, Citigroup analysts value the 2029s as low as 20, a considerable drop form the low 50s seen in the secondary market prior to the government’s announcement.

In order to maintain a balanced budget, the government needs to have an average interest rate of around 2%, given that it is running a primary surplus of 2% of GDP and has total debt, including contingent liabilities, of around 100% of GDP, Carl Ross, managing director of investments at Oppenheimer, said earlier this year.

It is contingent liabilities from disputed claims of former shareholders in nationalized telecom 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.

The ad-hoc committee is made up of holders of more than US$200m of the 2029s.

“We are sympathetic, but this is also the most organized and unified group of bondholders that has been involved in a recent sovereign debt restructuring,” said committee head Mediratta.

“We expect to have a proper and good faith negotiation based upon ability to pay.”

White Oak is advising the government, while BroadSpan is advising bondholders.

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