Belize creditors face up to a significant haircut on debt exchange

According to the Prime Minister of Belize, Dean Barrow, the bond swap, in addition to a 10% principal haircut will imply a reduction in interest payments that will result in total net present value (NPV) losses to bondholders of approximately 43.25%, according to local media outlet 7Newsbelize. Reporting on the presentation of the bill by Barrow to the house of representatives ahead of its approval on February 12, 7Newsbelize commented, "notably, the interest owed to bondholders up to September 2013 won't be paid, it will be capitalized - a savings for Belize of 76 million dollars. Also on the upside for Belize: no consent fees are being paid to bondholders, and there are no value-added incentives given to bondholders; such as oil certificates or GDP warrants." "If those had been given, bondholders would have gotten a cut of future oil revenues, or a slice of the GDP if it grew beyond a certain level, as a compensation for their losses. But no warrants means that they won't get any added portion of future growth in oil or GDP," added the media outlet. The deal, which is expected to be launched on Friday (Feb 15), will also require a 75% acceptance rate by bondholders to trigger a collective action clause, forcing holdouts to accept the new bond offering. PREMATURE However, ascribing an NPV loss of 43.25% may be premature. According to analysts, much depends on the exit yield for the bonds (the price ascribed by the market) when they exit the restructuring. JP Morgan analysts estimated a fair value price at exit of US$64.43 implying a total NPV haircut of 35.57%. Scotiabank's Joe Kogan estimated that based on a exit yield of 10% the price would be US$67, implying a haircut of 33%, with a higher yield leading to a lower price and a larger haircut. In attempting to decide on a suitable exit yield for valuation, Scotiabank pointed out that investors will be "forced to weigh a country with a poor record of performance on its debt against a market environment desperate for sovereign bonds," adding that should approval be granted by parliament and agreement reached with bondholders, the market price could rise to US$70. Carl Ross at investment bank Oppenheimer & Co pointed out that the deal negotiated by bondholders, is nearly triple the valuation first proposed by Belize of about 25 cents on the dollar. "I think Belize risk will settle in around the 9%-10% level, which would value the current bonds at 66.50 to 72.50, based on my calculations, and taking into account the haircut. I do not see much downside risk here. I think that the deal is attractive for bondholders and participation will be high," added Ross.