Barbados bondholders await clarity amid slide
June 11, 2018 |
Caribbean island edges closer to default, while investors lament its heavy leverage levels
Holders of Barbados' debt are awaiting clarity over terms of a potential restructuring after the island's dollar bonds slipped to between 50c to 55c on the dollar last week.
The slide in secondary trading came after the newly-elected Barbados Labor Party (BLP), led by Mia Mottley, said last week that an in-depth review had found "substantial arrears" previously left out of Barbados' headline debt figures.
"Clearly with such high levels of debt, and new debt discovered, it makes sense to look for a solution of fiscal austerity and debt renegotiation," said an investor who spoke to LatinFinance on Friday.
Barbados' local currency dollar peg remains a critical talking point among the investor community, and sources have said the government wants to maintain the feature.
Sean Newman, a fixed income portfolio manager at Invesco, said last week that attempts to restructure debt without removing the peg would prove dangerous.
"Without removing the pegged exchange rate and downsizing the public sector, be ready for Venezuela-type consequences," said Newman on June 4.
The first investor said on Friday that the stability of the peg would prove an "interesting debate" because devaluation of the currency remained a "serious red line" for government.
Another investor lamented the near-term woes facing the Caribbean island and its associated finances. And while the rest of region tackles global volatility, he said Barbados' hurdles come off of fiscal mismanagement.
"Unfortunately for the size of the country, it is way over-levered," he said. "It is hard. They live off of tourism and the domestic market is not large enough.
The government has appointed White Oak Advisory and CGSH as financial advisors.
Barbados' gross international reserves was $220m at the end of May, equivalent to seven weeks worth of export cover, while total public debt was more than 175% of the Caribbean island's GDP.
The first source opined that this situation had been on the cards for some years now. "The previous government did everything they could to get to the elections without an IMF program. The Jamaican model shows there can be success within an IMF framework."
On Thursday an IMF team released a statement following a visit to Barbados, saying the island was in a "precarious situation." The multilateral financier said fiscal consolidation was needed to lower debt in conjunction with the proposed debt restructuring and to address balance of payments risks.
The IMF added that tax and revenues were high and any adjustments should focus on the expenditure side through improving public services, containing wages and reforming government pensions.
As previously reported by LatinFinance, the new Prime Minister said Barbados would suspend payments due on debt owed to external commercial creditors, but aims to make scheduled domestic interest payments.
Last week, S&P Global Ratings lowered the country to selective default from CCC+.
In last month's election, Mottley's center-left BLP won all 30 seats in Barbados' House of Assembly.
Since 2010, St. Kitts and Nevis, Antigua and Barbuda, Grenada and Jamaica have had to default and restructure debt.
Barbados has not tapped international bond markets since 2013.