When Belize offered to buy back its sole outstanding Eurobond issue last month, the overwhelming majority of bondholders – 85% by value – agreed to the deal, even though they would only get back 55% of their principal.
That was unsurprising. The bond offering in question had already been restructured several times and its current version, a US$533m 4.94% 2034 note issue, was trading at around 40 cents in the dollar prior to the announcement of the buyback. Investors were also attracted by Belize’s plan to tie-up with The Nature Conservancy and pledge US$23.4m of the savings indirectly made through the buyback to endow a trust to protect the coral reef off its coast. The reef is the second largest in the world and a major tourist attraction for the country.
However, the Caribbean sovereign still has to find the money, estimated at US$340m, to complete the buyback, set up the trust and pay its advisers. That is no easy task for a small tourism-reliant economy hit hard by the pandemic.
“Belize sounds great but they don’t have the cash. There is very little transparency on how the financing on the other side looks,” said one sovereign debt restructuring adviser.
The country is hoping to raise the necessary money by tapping the current thirst for blue bonds, instruments that raise proceeds for marine-related projects.
The plan would see Belize borrow the money from a special purpose vehicle set up by TNC, which in turn is taking on the task of raising the blue bonds, with the help of Credit Suisse.
The bank has said it will in the meantime provide the financing from its balance sheet.
So far neither Belize, TNC nor Credit Suisse have said what the terms of the blue bonds or any alternative funding will be. The US International Development Finance Corp has agreed to help, by effectively insuring against the political risk that Belize is unable to pay back the blue bonds.
But investors familiar with the situation reckon it is likely that the complicated financing may not get syndicated by the time the buyback has to be effected on November 19, and Credit Suisse could for now end up holding the risk on its balance sheet.
And if the country were to do a public offering of blue notes, some doubt investor willingness to purchase the deal, even with TNC as an intermediary.
“This would need to be a private placement-type of deal. To go to the general market for this one would be horrendous,” said a trader who used to trade Belize bonds but said most of his clients have not touched the sovereign for some time. “We haven’t traded them in a couple of years. Nobody wants to buy Belize bonds; investors have been burned too many times.”
Others are concerned that a difficult blue bonds transaction from Belize could damage the future of such instruments. “There is a danger that this could ruin the reputation of blue bonds, if in the end The Nature Conservancy are unable to issue them for Belize,” said the adviser.
Only a handful of blue bonds have been issued in the past. The Seychelles did so as part of a restructuring between 2015 and 2018. That was easier since the liabilities being restructured were owed to the official sector, which was happy to offer concessional financing to support the conservation pledge.
In Belize’s situation the debt being restructured is in private sector hands and is being replaced by another private sector facility, albeit with some collateral enhancement from the official sector. The adviser said that might not be enough to effectively save the country much money.
He highlighted what had happened with Ghana in 2016, when it announced it had received a package from the International Monetary Fund and shortly afterwards issued fresh Eurobonds. “The country had to pay up [at nearly double digits] even though the facility meant it was guaranteed to pay anyway,” he said.
Investors could drive a similar hard bargain for Belize, if they argue that they will still have to take on the risk of a serial defaulter.
Claudia Calich, an emerging markets fund manager at M&G, said: “We welcome this innovative approach. At the same time, good ESG intentions cannot replace prudent economic management and willingness to pay. If history repeats itself – and we hope it will not here – the upcoming blue bond may well see itself restructured once or twice over its tenor. If that occurs, though from a blue start, investors will be seeing red again.”
Other countries with significant marine resources in the Caribbean and elsewhere are understood to be keen on blue-linked financing too and will be watching with interest.
The adviser said an alternative structure might be more appropriate. “Belize is a one-off. It is probably better to separate out any restructuring from a blue bond issue,” he said.
An example of how this might work is being explored by Barbados. This will see the country, which restructured three years ago, also buy back some of its debt at or around par by using concessional finance and pledge the subsequent interest savings for marine conservation plans.