Belize relies on coral reefs to negotiate with bond holders

Belize is set to strike a deal with international bondholders after admitting it can’t afford to pay off its debt and relies on an unusual asset to help it: its coral reefs.

Earlier this month, the Caribbean country, whose tourism economy is ravaged by the pandemic, agreed to buy back its only international bond from investors at a very favorable price, using cash on loan from Nature Conservancy, an environmental group based in the United States. As part of the deal, Belize will pre-fund an endowment of $ 23.4 million to support marine conservation projects on its coastline, which is home to the second largest barrier reef in the world.

Other investors have yet to accept the extent of the redemption discount before the deal goes through. But if Belize manages to get the approval it needs for the $ 530 million bond, the country could get the first green-tinged debt restructuring, capitalizing on the hunger of big fund managers to demonstrate their commitment. in favor of environmental, social and governance-oriented investments.

Investors and advisers say the deal could serve as a model for future restructuring negotiations, in which cash-strapped countries use the promise of environmental conservation to negotiate harder – in effect creating a mechanism that allows investors in rich countries to pay poorer countries to protect the natural world.

“We live in a world where many institutional investors profess ESG sensitivities,” said Lee Buchheit, the senior sovereign debt restructuring lawyer who advises the Belize government. “In any restructuring, things always get complicated when you hit the last pennies. We hoped that the environmental aspect would soften the deal.

The buyback transaction, which offers investors 55 cents for every dollar of debt they hold, needs the support of an additional quarter of bondholders to be successful.

But a group of investors led by GMO, Abrdn and Greylock Capital, representing half of the bondholders, have already blessed the project. Carlos de Sousa, portfolio manager at Vontobel Asset Management – a member of that group holding around 10 percent of the bond – said the proposal matches his firm’s focus on ESG.

“While 55 isn’t the most astounding salvage value, we love the deal,” he said, adding that investors got more of their money back in previous restructurings. “To think that we are helping to save the second largest coral reef in the world is certainly positive. This makes you a little less inclined to push for 60. “

Cecely Hugh, investment advisor at Abrdn, said the marine endowment “definitely makes the offer more attractive”.

For Belize, whose debt stands at 133 percent of gross domestic product despite restructuring its borrowing five times in the past 15 years, the deal offers the chance to recoup its reputation as a serial defaulter.

Conservation of the oceans is crucial to the country’s economy, with 40 percent of production coming directly or indirectly from tourism, and one in ten workers is employed in the fishing industry.

Conventional debt restructuring processes leave all savings to be spent – or poorly spent – as the debtor government sees fit, Belizean Prime Minister John Briceño has said, often leading to a cycle of “over-borrowing followed by a nasty purge. through a debt restructuring, followed by another borrowing frenzy and yet another purge ”.

In this case, he said, “Belize’s pending offer attempts to break this cycle by funneling some of the debt relief into investment in the Belizean economy that will translate into benefits for the economy. Belize and the planet ”.

The Belize deal is not the first time ESG has intervened in restructuring talks. Last year, a group of investors pushed for the inclusion of ESG criteria in Ecuador’s debt swap, potentially leading to payments on the country’s new bonds tied to its ability to achieve environmental objectives aligned with the Paris climate agreement. Some holders of bonds issued by Argentina’s province of Buenos Aires also argued for ESG restructuring earlier this year.

Although neither of the two attempts paid off, Belize’s advisers took note. “This feeling is precisely what we were aiming for,” said Buchheit.

Fund managers say the restructuring talks present a unique opportunity to raise their ESG concerns with governments, which are generally less susceptible to pressure from investors than companies. “Engagement has always been a very delicate area with sovereigns versus corporations,” said Yerlan Syzdykov, Global Head of Emerging Markets at Amundi, who has been involved in the restructuring in Ecuador and Buenos Aires. “But if you are already involved in a negotiation, you can try to discuss the direction of development with regard to sustainability goals.”

Not all investors agree with such programs. Hedge funds, for example, are generally keen to “maximize salvage value over anything else,” Syzdykov said. Despite this, he expects ESG to feature more and more in debt negotiations. “The big idea here is that rich countries – or investors representing mostly rich countries – should be able to help poorer countries pay for the transition,” Syzdykov said.

In 2013, Ecuador abandoned its plan to persuade rich countries not to pay it not to drill for oil in the rainforest after the project drawn up by former President Rafael Correa reported only $ 13 million.

Debt restructuring talks potentially offer a new mechanism to achieve a similar goal, says de Sousa de Vontobel. Suriname, another Amazon country on the verge of becoming a major oil exporter, might be tempted to try something similar in its current negotiations with its creditors, he said.

“The Belize accord offers an example of how rulers can monetize environmental protection,” de Sousa said.