EXCLUSIVE: Grenada seeks moratorium on debt payments
May 11, 2020 | Daniel Bases
Caribbean country cites G20's decision to suspend IDA nation payments, which could set a precedent
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The Caribbean island nation of Grenada is asking its private sector creditors for a moratorium on bond payments, citing the Group of 20 (G20) major economies’ decision to suspend debt service payments until Dec. 31 for International Development Association (IDA) nations.
Grenada’s tourism-led economy has been hit particularly hard by the coronavirus pandemic. As an IDA-listed nation, it asked for the pause in a three page letter sent on May 4th to the bond’s trustee bank, The Bank of New York Mellon.
If the government is successful, this could potentially set a new precedent by getting private sector investors to agree to terms that currently apply only to bilateral official sector debt.
In the letter obtained by LatinFinance from a source who requested anonymity, Keith Mitchell, who serves as both Prime Minister and Minister for Finance, asked that the payments of principal and interest totaling $15.4 million over the this eight-month period, be suspended.
“Our initial projections show a severe contraction of at least 10 percent in our Gross Domestic Product, an increase in the Debt to GDP ratio, sharp contractions in revenue collection (at least 50 percent),” Mitchell wrote.
“Very importantly, our Tourism sector is now closed,” he said, noting that it accounts for 60% of its foreign exchange and thousands of jobs.
Attempts to reach Mitchell’s office through phone and email were unsuccessful.
In the G20’s Communique of April 15, where it supported the suspension of debt service payments for the world’s poorest countries who asked for forbearance, it also cited the private sector.
“We call on private creditors, working through the Institute of International Finance, to participate in the initiative on comparable terms,” the document said. The IIF is a lobby group for the world's largest financial institutions.
Separately, the IIF, on May 7, issued a research note saying all Debt Service Suspension Initiative-eligible nations owe nearly $13 billion in debt service payments to external creditors from May 1 through the end of the year.
Among the 73 DSSI-eligible sovereigns, only 26 nations have eurobonds that amount to a total stock of $70 billion. "Eurobond debt service through the end of this year amounts to $4.9 billion, of which interest payments represent $3.7 billion," the note said.
The International Monetary Fund forecasts Grenada's GDP in 2020, at constant prices, will contract 8% and then grow by 6.1% in 2021. The current account balance, as a percentage of GDP, is set to contract 27.7% this year and only improved to a negative 18% in 2021.
Grenada was listed by the IMF as being in debt distress on April 30th. At the time that list was made public, the nation's debt situation had just been discussed two days prior by the IMF's Executive Board, but the details were not yet published.
Mitchell highlighted the IDA initiative is for countries like his which are current on any debt service to the IMF and World Bank.
“In light of the foregoing, Grenada hereby seeks the aforementioned debt service suspension as per the G-20 initiative terms,” Mitchell wrote bondholders, adding that because of the May 12th payment date the government asked “that a suitable extension be granted as we discuss this matter.”
He said the relief would allow the country to support the economy and utilize a task force to “seize opportunities to build a stronger, more diversified and resilient economy.”
CALL TO BONDHOLDERS
Grenada’s government held a 30 minute conference call with its small group of creditors on Friday, several sources told LatinFinance. It was not known if the island will make payments due May 12.
“The letter clearly struck me of wanting to maintain their reputation for prudent fiscal operations that they have built up over time,” said Carl Ross, a veteran emerging debt market portfolio manager at Boston-based GMO told LatinFinance. “They wanted to make sure to open a dialogue and we are early in the process.”
Ross participated on the call. He declined to say how much of Grenada’s sovereign debt the firm owns but did acknowledged they were a significant debt holder.
“The G20 statement’s wording is asking the private sector to participate. Grenada is therefore seeking that, although I don’t read the statement as a must. There is a strong suggestion to get or seek similar terms from private bondholders, but there may be other ways for private bondholders to engage on this front,” Ross said.
He did say that he believes Grenada has the liquidity to make the May 12 payment on the debt and that the bondholders continue to have discussions on what the country can do.
“I don’t think they need to do a restructuring and they may not need to do one. The authorities face a couple of options,” Ross said.
Those options include paying on time next week; use a 30-day grace period to work out a different kind of solution that could potentially include issuing more debt; or they could enter into a moratorium which would be considered an event of default.
“Which one they decide, I honestly don’t know,” Ross said, adding: “If they were to make a payment now that would send a good signal that they can and want to work with bondholders to figure out the rest of the year… We believe the government should pay the coupon.”
“I wouldn’t want them to throw away their reputation. Paying would provide a good model and that would set a good precedent to remain current on their payments. They are not making threats,” Ross said.
The bond in question, issued in 2017 for about $100 million, matures in May 2030 and carries a 7% coupon. Amortization payments have reduced the outstanding principal to $94.3 million, according to data provider Refinitiv.
The GMO Emerging Country Debt Fund, as of November 30, 2019, held 6.75% of the par value of the bond outstanding, according to Refinitiv data.
Grenada went through two debt restructurings in the last 16 years, first in 2004-2006 after Hurricane Ivan and a second from 2013-2015.
In 2015, Grenada restructured $262 million in defaulted debt from 2013 with bondholders agreeing to a 50% haircut on the original value.
“Both restructurings emerged as a consequence of weak fiscal and debt situations, which became unsustainable soon after external shocks hit the island economy. The two restructurings provided liquidity relief, with the second one involving a principal haircut,” the IMF wrote in a working paper published in 2017. Working papers do not necessarily represent the views of the IMF, rather those of the paper’s authors.
In his letter, Mitchell explained that Grenada expects “some modest recovery in 2021 but this is contingent on the recover of our Tourism and other key sectors, which remains a huge unknown, given the significant uncertainty about the length of this pandemic not merely in Grenada but in our key source markets which are the USA and the UK.”
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