Belize relies on coral reefs to bargain with bondholders

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Newsletter: Moral Money

Belize admits that it cannot repay its debts and counts on an unusual asset to help: its coral reefs, which are gradually reaching an agreement with international bondholders.

Earlier this month, this tourism-focused economy was devastated by the pandemic. The Caribbean country agreed to use cash lent by the U.S. environmental organization The Nature Conservancy to buy back its only international company at a huge discount from investors. Bonds. As part of the transaction, Belize will advance a US$23.4 million endowment fund to support marine protection projects on its coastline, which is home to the second largest barrier reef in the world.

Before the transaction is completed, some investors need to agree on the size of the repurchase discount. However, if Belize can obtain the approval of the $530 million bond it needs, the country can obtain the first debt restructuring with a green tone, using the desire of large fund managers to demonstrate their environmental, social and governance drive Commitment to type investment.

Investors and consultants said that the agreement can be used as a template for future restructuring negotiations. In the negotiations, countries that are short of funds use the promise of environmental protection to promote harder bargaining—actually creating a mechanism for investors in wealthy countries. Let poor countries pay to protect the natural world.

Lee Buchheit, a senior sovereign debt restructuring lawyer who advises the Belize government, said: “We live in a world where many institutional investors have shown ESG sensitivity.” “In any restructuring, when you get to the last few cents, Things always get tense. We hope that the environment will make the transaction sweeter.”

The repurchase operation provides 55 cents for every dollar of debt held by investors and requires the support of another quarter of the bondholders to complete.

But a group of investors led by GMO, Abrdn and Greylock Capital, which represents half of the bondholders, has already expressed support for the plan. Carlos de Sousa, portfolio manager of Vontobel Asset Management, said the proposal is consistent with the company’s ESG focus.

“Although 55 is not the most amazing restoration value, we like this transaction,” he said, adding that investors have recovered more funds in previous restructurings. “It is certainly positive to think that we are contributing to saving the world’s second largest coral reef. This makes you less inclined to push 60.”

Cecely Hugh, Abrdn’s investment consultant, said that ocean donations “will definitely make the offer more attractive.”

For Belize, despite five restructuring of borrowings in the past 15 years, its debt still accounts for 133% of GDP, and this transaction provides an opportunity to repair its reputation as a continuous defaulter.

Marine protection is vital to the national economy. 40% of the output comes directly or indirectly from the tourism industry, and 1 in 10 workers is employed by the fisheries sector.

The Prime Minister of Belize, John Briceño, stated that traditional debt restructuring procedures would spend or waste any savings where the debtor government deems it appropriate. This usually leads to “over-borrowing and then unpleasant debt restructuring. Clean up, then borrow again” cycle. Overeating and overeating will purify once again.”

In this case, he said, “Belize’s pending offer attempts to break this cycle by using part of its debt relief for investment in Belize’s economy, which will benefit Belize and the planet.”

The Belize deal is not the first time ESG has appeared in restructuring negotiations. Last year, a group of investors pushed for the inclusion of ESG standards in Ecuador’s debt swaps, which may cause the country’s new bond expenditures to be linked to its ability to achieve environmental goals consistent with the Paris climate agreement. Earlier this year, some bondholders issued by the province of Buenos Aires in Argentina also promoted ESG-friendly restructuring.

Although these two attempts were inconclusive, Belize consultants noticed. “This sentiment is our goal,” Buchheit said.

Fund managers said that restructuring negotiations provide a unique opportunity to raise their concerns about ESG to the government, which is generally less susceptible to investor pressure than companies. “Compared with companies, the involvement of sovereign states has always been a very tricky area,” said Yerlan Syzdykov, global head of emerging markets at Amundi, who participated in the restructuring of Ecuador and Buenos Aires. “But if you are already involved in the negotiations, you can try to discuss the direction of the sustainable development goals.”

Not all investors participate in such programs. Syzdykov said, for example, hedge funds are usually concerned about “maximizing the value of restoration.” Even so, he expects that ESG will increasingly appear in debt negotiations. Syzdykov said: “The grand idea here is that rich countries — or investors who mainly represent rich countries — should be able to help poorer countries pay for the transition.”

In 2013, after a plan devised by former President Rafael Correa raised only $13 million, Ecuador abandoned its plan to persuade rich countries not to extract oil in the rainforest.

Vontobel’s de Sousa believes that debt restructuring negotiations may provide a new mechanism to achieve similar goals. He said that Suriname is another Amazon country that is about to become a major oil exporter, and it may try something similar in its current negotiations with creditors.

“The Belize Agreement provides an example of how sovereign states can monetize environmental protection,” De Souza said.

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