Belize tests market reaction with debt service trigger
published: Wednesday | September 27, 2006

Keith Collister, Business Writer

Belizean president Said Musa is seen here at the inauguration of a new electrical supply power plant in Panama City, Panama, on July 11. - Reuters

Belize has triggered a special facility on two of its debt instruments to cover September payments, saying it did so to retain its limited cash pool for servicing external debt without similar safeguards.

But analysts see the move as a test of market reaction to the possibility of a default.

"I think that Belize, heavily influenced by its advisors, is using this as a signalling device," said Dr. Carl Ross of Bear Stearns, an American investment bank.

"The purpose of the signal is to demonstrate the upper hand, try to inject some urgency to the process, and perhaps even to try to drive down the price of the debt."

Liquidity problems

Belize, a Central American country of 287,000 people bordering the Caribbean, had already informed its creditors in early August that it was experiencing 'acute' liquidity problems, and was moving to restructure its debt.

The announcement that the September payments were made from a "prepaid debt service account" that was triggered because of Belize's cash crunch, is being taken as early warning that the country could default on future payments.

"The lower the price of the debt, the more leverage the government has in the restructuring process," said Ross.

"By making this move, the government is sending the message that the next coupon on the global bonds is very, very uncertain."

But Belize's finance ministry, though it has not sugar-coated its position, has indicated that right now it continues to restructure and would hurdle each payment as they become due.

"The resort to the prepaid debt service accounts in the two structured facilities was driven by a need to conserve the very limited pool of liquidity available to the government in an effort to permit, for as long as possible, the government to maintain its policy of normal debt service pending an orderly restructuring," said the finance ministry.

The instruments to which Belize referred appeared to be two highly creative special purpose vehicles (SPV) - Belize Sovereign Investments 1 and 2 - the govern-ment had set up in Cayman with the assistance of its investment banker Bear Stearns.

These vehicles had been used to raise money internationally by way of a private placement in early 2005, the repayment of which was to come from debt service payments from the Belize government.

The SPV's had the unusual feature that all payments to the international lenders due from their issued debt "would be covered, directly or indirectly, by the combination of an insurance policy and a cash collateral account funded out of the proceeds of the two loans."

Debt payment

More specifically: "The structure of both these facilities required the Government to pre-pay the maximum debt service due under each facility for one, six month period," said the Belize finance ministry in a release from the capital Belmopan.

"That pre-payment feature - taken together with the insurance policies - was designed to assure uninterrupted servicing under the vehicles debt instruments should the Government of Belize experience liquidity difficulties during the term of the facilities."

Bear Stearns appears to have arranged this deal for Belize as a replacement for a joint failed US$225 million eurobond issue over the period May to August 2004 through Morgan Stanley/Deutsche.

The investment bank failed then to raise the money through the issue as Belize's two outstanding eurobonds were trading at huge discounts to their par or face value, reflecting from then market concerns of a default by the Government of Belize.

Belize in August employed leading U.S. Wall Street law firm Cleary Gottlieb and investment bank Houlihan Lokey as financial adviser, to restructure its debt.

A banker familiar with the country advises that the firms represent the type of advisors commissioned when a default is imminent.

The banker argues that Belize appears to be going down the adversarial route that leaves investors guessing, as opposed to a 'market-friendly' debt restructuring, adding that the current situation resembles that of Argentina when it defaulted.

Belize also has a fixed exchange rate, no fiscal discipline and a lack of social consensus, he said, but unlike Argentina, it does not have a strong domestic capital market.

A debt default, said the banker, could cut-off Belize from the international capital markets, limit its access to financing, and consequently limit its long term development and growth.

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