Friday, August 18, 2017

The Truth About BarrowBond 3.0

Sunday, March 12, 2017, 17:01
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Wednesday, 08 March 2017  
  1. This is once again kicking the can down the road, taking the burden off our shoulders and putting it squarely on the backs of our children. Forget about any claim of net present value savings, that is all hocus pocus economics.  Let us look at the real actual cash savings on cash outflow over the life of the bonds.  For the period from now until Feb 2034, under SB 2.0, the total interest payments made add up to US$410mn.  Under SB3.0, the total interest payments for the same period add up to US$403mn, a total savings in actual cash outflow of the grand sum of US$7mn over 17 years.  That amounts to a savings of roughly US$400K per year.  Was there any savings in principal?  Was there any principal haircut?  No.  So all this renegotiation and hiring of local and foreign legal and financial advisors was for a savings of US$7mn.
  1. And what did it cost us to get this savings of US$7mn? Well according to the revised terms, Government has agreed to pay a consent fee of 0.25% to the bondholders.  That amounts to over US$1.3mn.  Second, government is also obliged and will pay the creditors committee legal and advisory fees that add up to no less than US$2.875mn already. Those two together already add up to US$4.175mn.  Government has not told us how much the foreign and local advisory fees add up to but it certainly won’t be a pittance. So not counting government’s foreign and local legal and financial advisory fees, there is a total cash savings of not even US$3mn. So it turns out then that we only have actually saved any money if the local and foreign legal and financial advisory fees is less than US$2.825mn.  This begs the question - how much are those local and foreign advisory fees and who has received those fees?
  1. The fees questions apart, one may ask why are the cash savings so small if the interest rate was reduced from 6.767% starting in August 2017 to 4.9375%? The answer is because rather than start paying down principal from 2019, we don’t start paying down principal until 2030.  The effect is that while the interest rate is lower, we are paying interest on a much larger sum for a much longer period of time, kicking the can down the road.
  1. While the cash flow savings is actually negligible, inconsequential, the average cash flow requirement over the life of the revised bond is not. Under 2.0, the average cash flow requirement over the remaining life of the bond would have been approximately US$22mn per year.  Under the original revised terms proposal, the average cash flow requirement would have also been roughly US$22mn per year.  Under these revised terms, the average cash flow requirement actually increases to US$26mn per year.  That is because we have to pay the full amount of the principal sooner.  If the government is to run this country in a prudent fiscal manner, then it can’t just think about what is due next year and that it only has to worry about that interest payment for next year.  It must also plan for the five annual principal bullet payments of as much as US$106mn per year starting 13 years from now.  That means it may have to start creating a sinking fund or devise some other means from now to accumulate the funds necessary to pay the principal when due.  What is the plan to accumulate those funds?  The government has said nothing about that whatsoever. So as much as GOB may want to talk about the net present value savings, the real effect is that we will have to come up with more money now and more money on average per annum for the life of this bonds with its revised terms.
  1. The bondholders once again can smile all the way to the bank while the GOB can fool the people into thinking that they made a good deal. First, it must be understood that many of these bondholders did not buy the bonds when it was issued or near the original issue value.  No, many of them bought these bonds for cents on the dollars.  The public may recall that the bonds had been trading for prolonged periods of time below 50 cents on the dollar, at times around 41 cents on the dollar as recent as January of this year.  Since falling to those lows, the bonds have been trading at increasingly higher prices.  These price increases are as a result of trading of these bonds and the expectation of a good deal coming for the bondholders not for the government.  As of Friday, the bonds were trading at 51 cents on the dollar, an increase in value of nearly 25% in just a few months.  Clearly some bondholders are already smiling.  With these revised terms, the gain to the bondholders will be even greater as the price of the bonds increase further.  One investment advisor considers a range of near 65 cents on the dollar plus or minus.  Not surprisingly, he refers to this Superbond 3.0 as “Restructuring Light” and is not surprised in the least that the bondholders would accept same.  Some bondholders are making super profits in excess of twenty percent just by simply holding the bonds and accepting the revised terms.
  1. The people of Belize of course gain nothing in this and in fact as expected are the losers in this renegotiation. The government commits to a primary surplus of 2% of GDP for each of fiscal years 2018/19, 2019/2020 and 2020/2021.  The primary surplus/deficit is the government’s revenues less expenditure excluding government interest payments.  The Government according to the IMF numbers in its last consultation report has not achieved a primary surplus for at least the last five years, with the last two years being a primary deficit of -5.6% of GDP in 2015 and -2% of GDP for 2016.  The IMF in fact predicts a further primary deficit in 2017 of -2.2%.  We note that the Financial Secretary has mentioned that there is rigidity in government expenditures and that an increase in taxes is inevitable.  Well, if the government is to successfully achieve a primary surplus of 2% when it will have been unable to do that for no less than six years in a row, it can only do that with major tax increases and major cuts in expenditures - none of which bodes well for Belizeans or the economy.
  1. Besides the inevitable increase in taxes, it seems also inevitable that the government will not achieve the required primary surpluses. That most certainly means the IMF.  This is the future we have to look forward to.
  1. In the end, for all that this superbond has consumed our media and the public, there is hardly a positive to be said for this super bond 3.0. It is at best a wash but more so a political disguise of the true problems we are facing.  While the media has been talking about the super bond, they and the public have not been talking about the disastrous state of the economy, the risk of devaluation, the high rate of unemployment, the inevitable increase in taxes and yes, retrenchment.  Saving three million dollars does nothing to address these problems much less alleviate them.
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