Sovereign Analysis /

Belize: Here we go again, country heads towards fourth credit event in 15 years

  • Belize announced its intention to seek the consent of bondholders to capitalise a year’s worth of interest payments

  • Tourism-based economy hit hard by impact of coronavirus, but request may be milder than bondholders had feared

  • We upgrade our longstanding Sell recommendation on the Belize bond to Hold given recent price action

Belize: Here we go again, country heads towards fourth credit event in 15 years
Stuart Culverhouse
Stuart Culverhouse

Chief Economist & Head of Fixed Income Research

Tellimer Research
24 June 2020
Published byTellimer Research

Belize announced last week its intention to seek the consent of bondholders to capitalise interest payments on its sole US$ foreign bond (4.938% 2034) through to February 2021 (see press release dated 17 June here). It aims to launch a Consent Solicitation by early July. This would cover US$26mn in interest payments; the next coupon payment, amounting to US$13mn, is due on 20 August. Approval of the Consent Solicitation, if launched, will require the support of more than 75% of holders. On the surface, what Belize is seeking may be milder than bondholders had feared.

Belize therefore becomes only the second country that we are aware of during the coronavirus pandemic to seek payment relief on its international bonds, after Ecuador's own consent solicitation exercise in April to defer coupons falling due through July, and excluding Seychelles and Grenada (both of whom thought about it but changed their minds), Argentina and Lebanon (whose debt problems pre-date coronavirus), and Zambia (who announced its intention to restructure its foreign debt in March and has since appointed advisers, although we don't yet know what that means for the bonds and they remain current). That said, one difference may be that while Ecuador may be heading towards a more comprehensive debt restructuring, Belize is only seeking temporary payment relief although it is not clear where it will really end up.

Read-across to DSSI

Moreover, it is interesting to note that neither Belize nor Ecuador, the two countries during coronavirus that have actively sought (or are seeking) flow relief, are on the list of countries eligible for debt service suspension under the G20's DSSI; they are not IDA-eligible countries or classified as low income. And, while Belize's approach seems to mirror the basic intention of DSSI, there are some subtle differences (and there is no reason for countries outside of scope for DSSI to copy it anyway). Unlike DSSI, Belize is seeking to defer two coupons through to next year (although there is a risk that DSSI is extended beyond the end of this year too), repayment of coupons under Belize's consent solicitation will be over the remaining life of the bond (14 years) rather than four years and, unless agreed otherwise, it will not be PV neutral.

Indeed, it might be seen by the official sector as an affront that so far, as far as we know, none of the poor countries for which debt service relief under DSSI was designed have sought private sector participation, for various reasons that are well known, while some 37 countries have made formal requests for bilateral relief (according to the IMF at its regular press briefing on 18 June). We wonder, if by the time of the IMF/WB Annual Meetings in October, the situation remains unchanged, whether the official sector may take a more forceful approach to ensuring comparability of treatment (less carrot, more stick), especially amid suggestions from the official sector about widening the scope of countries and/or the suspension period, which could set the stage for greater tension, and even risk throwing the baby out with the bath water. However: (i) bondholders' readiness to provide help to countries has been demonstrated in the past, most recently in the case of Ecuador; (ii) there is an existing framework for doing so (codified by the IIF Principles of Sovereign Debt Restructuring); and (iii) consent solicitation may be emerging as the most practical approach to dealing with this, especially in the context of liquidity crises. Meanwhile, the recovery in risk appetite means that market access has returned for many high yield (even poorer) countries. Perhaps one question most obviously posed by Belize (and Seychelles before it), is why we haven't seen other tourist-dependent economies that are eligible for DSSI, especially those with only one single bond – and harbouring little intention of being repeat issuers – seeking private-sector treatment (unless of course they judge the cost-benefit as not worth it).

Economic developments

Belize's call to bondholders may not be a surprise. While we recognise that ability to pay will become more impaired due to the economic impact of coronavirus, it is the authorities' willingness to pay that bondholders doubt due to its poor payment experience. The country is a serial defaulter with a recent history of bond restructuring, three episodes over the last 15 years (2006/07, 2012/13, 2016/17), and the prime minister appeared to lay the ground for this latest decision, and its fourth credit event (default) – which must be a record – in his comments at a press conference last month, noting "the writing is on the wall". Rating agencies anticipated this too, with S&P downgrading its rating to CCC from B- on 16 April and Moody's downgrading its rating to Caa1 from B3 on 12 May. Bond prices, which had been drifting lower anyway since the coronavirus pandemic erupted, slumped as a result, from US$50 at end-April to US$40 by mid-May.

Belize's largely tourism-based economy will be hit hard by the global economic impact of coronavirus, cyclically and potentially structurally, amid uncertainty about the future of travel. Belize is not alone there however, as Moody's recently warned (see 'Credit pressure to grow in tourism-reliant EM islands' for Bloomberg subscribers), although others haven't sought debt service relief on their bonds (yet, perhaps; Seychelles and Grenada appeared to try but rowed back, while other small tourism-dependent islands with bonds, such as Maldives and Fiji, may be watching closely). Tourism comprises c40% of Belize's current account receipts (CAR) on our calculations and directly accounts for c25% of GDP (the direct and indirect contribution of tourism to its GDP is even higher, over 40%, according to IMF figures, which makes it one of the more tourism-dependent economies in the Caribbean).

The government expects real GDP to fall by as much as 18% in 2020, according to its press release, and this follows modest growth of just 0.3% in 2019. Real GDP fell by 4.5% yoy in 2020 Q1 according to the central bank, due to the effects of drought as well as the early impact of coronavirus. First-quarter domestic exports fell 30.3% yoy, while stayover arrivals fell 22.1% yoy and cruise ship arrivals fell 25.1% yoy. Reserves have however been fairly stable, at cUS$258mn in May 2020 (as proxied by central bank approved external assets), largely unchanged from the same period a year ago (hence annual debt interest on the bond is about 10% of reserves).

Fiscal plans will also need to be re-drawn. The FY2020-21 budget, which was only presented on 5 March (before the full global economic impact of coronavirus became clear), projected a widening in the overall fiscal balance to a deficit of 3.2% of GDP, compared to a 2.0% deficit in FY2019-20, based on an easing in the primary surplus. The budget projected close to primary balance this year after a primary surplus in the previous two years; the government's target is a 2% primary surplus in order to keep public debt on a declining path. This looks harder to achieve in the post-coronavirus world. Still public debt remains high, at 95% of GDP in FY2019-20. The "Super bond", at US$526.5mn outstanding, still accounts for the bulk of public external debt (about 44%).

Hence, while Belize may be seeking temporary debt service suspension, debt dynamics – and hence the debt sustainability outlook – may now be more adverse due to a combination of high public debt, a weaker growth outlook (and possibly structurally lower growth) and concomitant weaker fiscal trajectory. This could threaten medium-term solvency.

Outlook for the bonds

Will bondholders agree? According to Bloomberg, bondholders have already organised (as they are permitted to do under the bonds' Representative Committee clause). The bonds' Collective Action Clause (CAC) means that more than 75% of holders will need to approve the change of payment terms under the Consent Solicitation (that is, it will only take cUS$132mn to block it). Ecuador shows that bondholders can engage constructively with sovereigns in agreeing to such a request if the borrower engages in good faith and is able to set out a credible plan consistent with its macroeconomic framework, while bondholders' rejection of the Province of Buenos Aires request earlier this year shows what can happen if that is not the case. And Belize after all is "only" asking for capitalisation of coupons in what can be seen as extenuating circumstances for which there may be some sympathy. But Belize comes with baggage, with this request coming only three years after its last restructuring (which involved coupon reduction, and a shortening of maturity to partially compensate).

Moreover, to be effective, we think the Consent Solicitation may also need to waive the principal reinstatement clause and the government's commitment to the 2% primary surplus target in FY2020/21, and sanctions if the target is not met, including IMF engagement on remedial action. FY2020/21 is however the last fiscal year for which the 2% target formally applies in the agreement with bondholders following the 2017 restructuring. Still, it is not clear how ready bondholders will be to give up these hard-fought protections that arose out of its previous opportunistic restructurings.

For the bonds, assuming capitalisation of the next two coupons (August and February), we think that is worth around 2-3pts in PV terms if we compare the PV of the bond under its existing payment terms with the PV of the bond with capitalised interest at the prevailing yield (Table 1). But with the bonds already priced in the low 40s (indicated as US$41.6 on a mid price basis as of cob 23 June on Bloomberg, and a yield of 16.3%), that might be neither here nor there, and in fact, the bonds have risen 2pts since Friday, possibly as a relief rally (bondholders may have feared a harsher intention). Moreover, with a relatively small bond in fairly concentrated hands, a well-organised and robust bondholder group may be able to enhance recovery prospects if it came to it.

Still, at such a low cash price – more than 10pts below Zambia and a few points below Ecuador (where a deeper restructuring looks likely) – the jury seems to be out and it is not yet clear what an appropriate post-consent solicitation exit yield will be. Even before coronavirus, and despite stronger real GDP growth and some fiscal improvement in recent years (since the 2017 restructuring), the bonds languished at a cash price of cUS$60 and a 10-11% yield for most of the last three years. Moreover, while the consent solicitation will buy time and allow a formal waiver of a payment default (and forestall any legal ramifications such as acceleration), it will not stop the rating falling into default (at least temporarily) and this could deter new buyers into the name, possibly for some time to come. Hence, it is not clear to us that the bond will return in a post-Covid world to its pre-Covid levels.

That said, given the price action, we upgrade our longstanding Sell recommendation on the Belize bond to Hold.