Barrow’s suggestion of super bond restructuring “credit negative”: Moody’s
A recent pronouncement by the Barrow administration, in its bid for reelection, that it will seek the electorate’s instructions on the billion-dollar super bond has caught the attention of a major international ratings agency.
“The mention of a potential modification to the super bond, a US$565 million bond equivalent to half of all government debt and the result of the 2007 debt restructuring, is credit negative and raises concerns about another debt restructuring,” said the Weekly Credit Outlook issued by Moody’s Investors Service, and dated today, Monday, February 6, 2012.
Moody’s, in a report by Gabriel Torres, Vice President - Senior Credit Officer; and Maria Paula Carvajal — Associate Analyst, referred to Prime Minister Dean Barrow’s speech last week announcing the date of General Elections.
In that speech, Barrow said, “We, therefore, ask for your clear instructions to drive the naysayers back; to do something about the super bond,” which the ratings agency saw as a hint of a possible restructuring of the debt.
The graph accompanying the Moody’s statement on Belize shows that the monies payable for the next term of government, 2012-2017, would increase by US$10 million over this year’s payments; however, the increase is far more substantial for the subsequent term.
In fact, in 2019, Belize will have to start making principal payments on the super bond, which would mean the US$40 million payment (the current year’s repayment) would balloon to nearly US$100 million over a span of 7 years.
Moody’s notes today that, “Super bond debt service has been rising owing to coupon step-ups and will rise even further once the debt begins amortizing in 2019, putting increasing pressure on already weak public finances.”
It went on to say that, “Belize (B3 stable) restructured most of its debt in late 2006 and early 2007, after years of increasingly higher funding needs that peaked at over 20% of GDP in 2005.”
It noted that after the 2006/2007 debt restructuring, the government’s funding needs fell dramatically to less than 5% of GDP last year.
It adds, however, that “...concerns remain about the long-term fiscal position as the restructured debt service increases.”
Of note is the variation of interest rate for the super bond: “It has a stepped-up coupon, at 4.5% for the first two years, 6.5% for the next two, and jumping to 8.5% later this year,” the outlook report explains.
“Given low economic growth, estimated at 2.2% on average 2007-12, and expectations of lower royalties from oil production, which has been declining 5% a year and is a key government revenue source, managing the increase in bond payments was always going to be a challenge for Belize,” the report added. “The administration’s declarations open the door for a possible new restructuring, even before the greater bond-related fiscal costs fully materialize.”