Belize’s bond: not so super after all
Belize’s so-called superbond has not proved to be a super investment proposition.
The country has set out proposals on how it might restructure the bond, which bundled together several old debts (hence its name) and the ideas have been greeted with horror by investors. Essentially, the government wants to reduce the principal of the bond by almost half while extending the maturity by 13 years, according to one of the proposals. Interest rates on the issue, at 8.5 percent this year, could be cut to a flat 3.5 percent. Or investors could accept a 1 percent rate that steps up to 4 percent after 2019.
Markets had been expecting a restructuring ever since Prime Minister Dean Barrow said in February the country could not afford to keep up debt repayments. The bond duly fell after his comments but picked up a bit in recent months after Barrow assured investors the restructuring would be amicable. Investors holding the bond are now nursing year-to-date losses of 24 percent, according to JP Morgan.
There’s worse. If the government sticks to its original proposals, says Stuart Culverhouse, head of research at brokerage Exotix, the principal of the bond, currently at $544 million, could fall under $500 million. That will push it out of the main bond benchmark for emerging markets, JP Morgan’s EMBI Global, and would trigger automatic selling by funds benchmarked to the index. Culverhouse predicts that the bond, now trading at 42 cents on the dollar, will fall eventually to the low-20s. It started the year just over 60 cents.
JP Morgan which had been advising an overweight position on Belize relative to the EMBIG index, cut its recommendation to marketweight on Thursday. It tells clients:
We see the government’s opening stance indicating there is little upside to current bond prices, especially over the coming months.
So will the Belize debacle cool some of investors’ enthusiasm for frontier markets?
Maybe not. Bonds from these countries, mostly poor and usually first-time bond issuers, have been in high favour due to the yields they offer and so far this year they have outperformed the broader bond index. A country like Belarus for instance provides a 900 basis-point premium over U.S. Treasuries compared to the 160 bps pickup provided by a “safer” emerging markets credit Brazil.
What’s more, these frontier markets have been active bond issuers of late and already make up a tenth of the index (issuers include Sri Lanka and Guatemala that would once have been viewed as deadbeat credits). JP Morgan calculates that $1.8 billion worth of frontier dollar debt hit the new issue markets in the first half of 2012 and predicts another $2.5 billion before the year is out.