Moody's dumps Belize deeper into junk territory

Moody's dumps Belize deeper into junk territory

Bonds Debt Economy & Policy Corporate & Sovereign Strategy Fixed Income Funds Belize Latin America Coronavirus Credit Ratings Moody's Investors Service Downgrade

Editor's note: LatinFinance is making some of its most important coronavirus-related material available to all readers. Visit our coronavirus section for all our coverage and sign up to receive the Daily Brief newsletter in your inbox every morning.

Moody's Investors Service said Tuesday that it cut the sovereign foreign currency credit rating on Belize further into junk territory, lowering it to Caa3 from Caa1 six months after its last downgrade, citing a deteriorating financial situation.

The outlook on the credit was revised upward to stable from negative in the wake of the rating change.

"Moody's decision to downgrade Belize's ratings reflects the structural deterioration in government finances that is likely to push debt ratios to very high levels of over 130% of GDP, and the continued liquidity pressures the sovereign is facing due to its constrained financing options," the firm said in a statement.

The expectation, the firm said, is that Belize has a high probability of missing interest payments on its foreign debt or that there will be a distressed debt exchange due to the weak economy on the back of a devastated tourism economy that has suffered because travel has been curtailed by the COVID-19 pandemic.

"In Moody's opinion, the sovereign's liquidity and funding position will remain strained to such an extent that the government formed following the November 2020 general election is likely to seek liquidity relief that will lead to renewed losses for investors," the firm said.

In August, when bondholders accepted an interest payment deferral on Belize's sole external bond, a note maturing in 2034, Moody's considered that a distressed exchange providing only short-term relief. 

"Interest payments due from August 2020 to May 2021 on Belize's 2034 bond were deferred and capitalized providing $27 million (1.7% of 2020 GDP) in payment relief. The liquidity relief avoided a broader restructuring of the bond, but did not address solvency concerns that will be exacerbated as Moody's forecasts that government debt levels will exceed 130% of GDP by the end of 2020," Moody's said.

Financial pressures will not abate in time for the next interest payment due in 2021, the firm forecast. That means the risk of financial losses has increased for investors, Moody's said.

Still, Belize's 4.9375% 2034 bond was quoted with a bid price of 49.75 on Tuesday, up 6.125 points to yield 13.951%, according to data provider Refinitiv.

In March 2017, Belize said 87% of the holders of its then 2038 superbonds consented to a restructuring of its bond. At the time, the new terms spelled out that the interest rated accrued will be set to 4.9375% from 5%. The notes will also no longer increase to 6.7%, as was planned for August of that year. The maturity was modified to 2034 from 2038.

Tourism accounts for 14% of gross economic value while there is an indirect contribution to the economy that has been measured as high as 50%, Moody's has said previously.

The expectation is for the economy to contract by 14% in 2020 and then rebound with gross domestic product growth of 8.1% in 2021, driven by a favorable base effect.