Barbados bonds slide after government suspends all debt payments; recovery rate of 22%-30% eyed

By Rebecca Melvin

New York, June 5 – Barbados’ U.S. dollar-denominated bonds have plummeted after the country’s new prime minister announced that the government will suspend all external debt payments and asked both external and domestic creditors to cooperate in restructuring.

Three bonds, totaling $540 million, dropped sharply, although the paper is very illiquid and the bid, ask spread is wide at about 43 bid, 46 offered, a market source said.

The sovereign 7¼% notes due 2021 were also reported to have changed hands at as low as 36 from about 92 last week.

The 2021 tranche is a $150 million deal. Barbados also has $200 million of 7% notes due 2022 and $190 million of 6¾% notes due 2035.

Barbados’ new prime minister Mia Mottley was elected in a landslide election on May 24. Her Barbados Labour Party took all the seats in the island’s parliament, completely unseating the formerly ruling Democratic Labour Party.

Last week the new government conducted a review of the fiscal and external liquidity situation and found substantial arrears of which some had been unreported. On June 1 a multi-pronged plan was announced to address what the government described as “critically low levels of international reserves, unsustainably high levels of public indebtedness, poor growth and major failings in public infrastructure and social safety nets.”

The government has also contacted the International Monetary Fund and has assurances from IMF managing director Christine Lagarde that funding support will be provided.

Using the IMF’s static debt sustainability model, Stifel emerging markets analyst Victor Fu estimates that the likely recovery rate range will be 22% to 30%, assuming that a sustainable growth rate of 3% and a sustainable primary fiscal balance-to-GDP ratio of 1.5% to 2%.

The sovereign’s currently extremely high existing debt burden of 175% of GDP is the main reason for the expectation of very low recovery rates, Fu wrote in a note published on Monday.

Had the debt to GDP ratio been 100%, the recovery rates would have been higher.

Trading in the bonds is “very sporadic,” Stifel’s Fu told Prospect News on Tuesday.

A second market source said the Barbados situation is not creating an overhang for the Latin America EM debt region in general. “It’s pretty isolated from the broader market,” the New York-based market source said.

© 2015 Prospect News.
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