By D. Michael Fox, CPA, CFE, FCPA, CBM 011-501-226-2622, firstname.lastname@example.org
(Writer’s Note: The material herein is based on an article about the Super Bond appearing in the August 9th, 2009 edition of The Guardian newspaper.)
In February 2007, the Government of Belize, at that time under the administration of the People’s United Party (PUP), signed an agreement for a BZ$1,100,000,000 (that’s $1.1 billion with a “b”) debt obligation. This debt has been termed the “Super Bond”.
The debt offering became necessary because in 2006 the Government found itself overly exposed to foreign creditors and at risk of defaulting on existing loan payment obligations, or even worse, facing a devaluation of the Belize dollar. The PUP administration had accumulated an unsustainable amount of private sector debt (at 11% - 12% interest rates) for a series of, what some considered, ill conceived and corrupt development projects.
In 2006, when Belize’s fiscal outlook had surpassed grim and the country was at serious risk of defaulting on its loan payments, the Government undertook to consolidate Belize’s sovereign debts. The debt restructuring was successful and the result was the “Super Bond”.
But some observers would opine that, while Belize had escaped its immediate financial crisis, the PUP administration had crippled the country’s ability to expand and to take advantage of new investment opportunities, while committing future generations of Belizeans to a debilitating debt repayment schedule.
The Super Bond is structured in such a way that, for the first 12 fiscal years beginning in 2007, no payments will be made on the principal and all payments will be for interest only. Interest payments are due semiannually on February 20th and August 20th. And, then starting August 20th, 2019, Belize must pay BZ$110,000,000 (that’s $110 million) principal payments annually for a period of 10 years until the Super Bond is paid off in 2029. But these annual principal payments are in addition to the continuing semiannual interest obligations stretching over the entire 22 year period of the Super Bond.
Meanwhile, the annual interest rate keeps rising. For fiscal years 2007 – 2009 the interest rate is 4.25%, then increases to 6% for fiscal years 2010 – 2011, then tops out at 8.50% (twice the initial rate) through the maturity in August 2029. So, the Super Bond becomes increasingly more expensive to maintain as the years go by.
Here is a year-by-year listing of the Super Bond payment obligations:
So, the “bottom line” is this: In order to restructure a debilitating debt load accumulated through spending programs which were made possible by infusions from loans rather than cash available from Government ongoing revenue sources, which loans could then not be repaid because of the poor quality of the underlying investments, the country of Belize is required to pay a total of BZ$2,941,000,000 (BZ$1,841,000,000 interest plus BZ$1,100,000,000 principal) to outside investors who purchased the Super Bonds over the 22 year period of the Super Bond.
(Writer’s Comment: The above schedule of annual interest and principal payments is that published in The Guardian newspaper and is presumed to be accurate based on the Super Bond repayment terms and conditions. However, it is curious why the interest payment in year three (3) is $55 million instead of $46 million using the same interest rate, and it is even more curious why the annual interest payments of $92 million beginning in year 13 do not start to decline because of the $110 million annual reductions of principal being paid beginning in that year.)