Sovereign Analysis /

Barbados: Assessment of exchange offer and new bond

    Stuart Culverhouse
    Stuart Culverhouse

    Chief Economist & Head of Fixed Income Research

    Tellimer Research
    21 November 2019
    Published byTellimer Research

    The government’s exchange offer for certain of its US$ debt is due to close on 22 November. This follows its launch on 5 November, and the publication of agreed terms on 18 October. 

    Holders of eligible debt – including the three existing US$ bonds – will be able to exchange into a new 10-year fixed rate amortising US$ bond at an aggregate discount of 26.3% on claim (principal and interest). The nominal haircut on principal is 25%. Past due and accrued interest (for ease of use, we describe this as PDI), which is recognised to 1 October 2019, is subject to a 35% haircut, with the remaining amount paid partly in cash, some capitalised into the new US$ bond and some turned into a new small detachable PDI bond. 

    We calculate the total claim (principal and interest) is cUS$774mn. Eligible principal is cUS$677mn, comprising mainly the three US$ bonds (21s, 22s, 35s) amounting to a total of US$540mn, plus some other loans (including some local law US$ bonds). Total PDI is US$97mn, of which we calculate the capitalised amount to be cUS$23mn.

    The new US$ bond has an October 2029 maturity, with equal semi-annual principal payments in the past five years, and a fixed 6.5% coupon. 

    It is hoped the new Barbados bond will be index eligible, which should enhance its liquidity. We estimate the size of the new bond to be cUS$531mn (around the same size as Belize 34s). 

    We estimate the package value (new bond plus PDI bond, excluding cash on closing) in PV terms to be 69.5 per unit of existing principal at a benchmark 10% exit yield. This comprises a PV of the new bond of 64.8pts, plus c4.7pts for the PDI bond. 

    The market may be pricing in a more optimistic exit yield of c8.7%. We observe that all three BARBAD bonds are now priced at 74.5 (mid) based on indicative Tellimer prices (71-78 market context as of 19 November), on a “for any and all” basis, having jumped c12-16% from the mid-60s after the launch of the exchange. Market prices (on a mid basis) correspond to an exit yield of about 8.7% on our estimate of the package value. .

    We reiterate our Hold recommendation. We think the market’s implied exit yield of c8.7%, based on secondary market prices of the existing bonds and our estimated package value, is close to fair value given country comps. We estimate fair value at c8.8% based on bonds with similar duration for countries with similar ratings and economic characteristics, albeit on a limited sample size. Positive factors include low post-debt restructuring debt service, strong policy commitment and ownership of the IMF programme, and index inclusion. However, still high pubic debt (c115% of GDP even post-restructuring) and low growth are negative factors. Indeed, the implied exit yield may even seem a bit rich compared with other sovereign restructurings (eg 8.4% on Mozambique’s new 2031 bond). 

    That said, we think technical factors to do with index rebalancing after the bonds are issued could support prices in the very near term. Longer term, the outlook will depend on IMF programme implementation and continued fiscal discipline amid weak growth in order to lower the public debt ratio.