## Belize Debt Restructuring, 2006–07: Indicative Scenarios

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### Overview and motivation
- Government exchanged various external debt instruments into one single U.S. dollar denominated bond (“super-bond”) with face value of US$547 million.  
- Exchange lengthened maturity and lowered coupon rates.  
- Restructuring undertaken in response to an acute external liquidity shortage and high debt service burden; solvency concerns remained after the exchange.  
- Paper focus: Cause, Process, Outcomes.

### Cause — macroeconomic background and triggers
- Public debt rose from 72 percent of GDP in 2000 to over 100 percent by 2003; 95 percent of total public debt outstanding was held by external creditors.  
- Central government overall deficit: average 3 percent of GDP in 1996–98 to about 9 percent of GDP in 2000–04.  
- External current account deficits averaged 17.3 percent of GDP during 2001–2005.  
- External public debt increased from less than US$400 million in 1998 to US$1.1 billion in 2005.  
- Net international reserves fell below one month of import coverage by end-2005; improved from 0.6 to 1.4 months of imports after initial adjustment.  
- Maturity structure at end-June 2006: 13 percent of liabilities due within a year; 25 percent maturing in 1–5 years.  
- Average effective interest rate on external commercial borrowing: 11.25 percent.  
- Fiscal adjustment in 2005: central government overall deficit reduced from 8.6 percent of GDP in FY2004/05 to 3.3 percent in FY2005/06; primary balance shifted to a surplus of 3 percent of GDP.  
- Debt-to-GDP trajectory projected to fall from 98½ percent at end-2005 to 84 ½ percent in 2012, then shift back upward without sustained primary surpluses.

### Process — negotiation, participation, and scope (2006–07)
- Announcement and advisors: intention to restructure announced August 2006; financial and legal advisors appointed in fall 2005.  
- Scope: targeted only external commercial debt; T-bills, domestic loans, and bilateral and multilateral claims were excluded.  
- Creditor coordination: committee formed representing holders of at least 51 percent of affected debt; authorities maintained contact with over 40 creditors who held more than 80 percent of the face value of total restructured debt.  
- Some coupon payments missed during negotiations (missed payments to two special purpose vehicles in mid-September 2006); restructuring characterized as preemptive with temporary arrears.  
- Offer launch: December 18, 2006. Eligible commercial debt comprised: (i) US$348 million global bonds (including notes); (ii) bank notes for US$53 million; and (iii) two insured loans valued at US$115 million.

### Indicative scenarios presented to creditors (October 2006)
- Options and parameters (as presented):
  - Option types: Discount; Discount; Par  
  - Face value haircut: 20% ; 20% ; 0%  
  - Grace period (years): 8 13 12  
  - Final maturity (years): 18 13 22  
  - Coupon scenarios:
    - Discount option 1: 2.5% until 2010; 4.5% until 2012; 9% until 2025  
    - Discount option 2: 2.5% until 2010; 4.5% until 2012; 9% until 2020  
    - Par option: 2% until 2010; 3.5% until 2013; 7% until 2029  
  - Repayment style: Amortizing; Bullet; Amortizing

### Deal structure and financial terms (final exchange, 2007)
- New instrument: single “super-bond”.  
- Face value of new bond issued: US$547 million (no principal haircut on aggregate).  
- Composition of exchanged old instruments (face values): Global bonds/notes US$348 million; Bank loans US$53 million; Insured loans US$115 million.  
- Maturities of old instruments: 2007–15 (global bonds/notes); 2008–12 (bank loans); 2010–15 (insured loans). New bond maturity: 2029.  
- Grace period for new bond: 12 years; amortization commencing in August 2019.  
- Remaining maturity (weighted averages) of old instruments: 6.2; 4.4; 5.8 years; new instrument remaining maturity: 22 years.  
- Coupon structure:
  - Old instruments (weighted/representative): Fixed 8.95–9.95% (global); Fixed 9.25–10% (bank loans); Fixed 10% (insured loans).  
  - New super-bond: 4.25% until 2010, 6% until 2012, 8.5% until maturity (step-up coupon).  
- Average coupon rates of new bond over maturity are lower by 2.1 percent than those of the old instruments on average.  
- Maturity extension: extended by 16 years on average; conversion from mostly bullet (85 percent of outstanding previously) to amortizing structure.  
- Present value on 2/2007 (by old instrument category): Global bonds/notes 102/104%; Bank loans 103%; Insured loans 105%; Super-bond 79%.  
- NPV haircut (discount rate 9.2 percent): 24 percent overall.  
- Market haircut: 21 percent overall.  
- NPV losses for holders of insured loans were 50 percent higher than those of global bonds and notes due to lower exchange ratio.  
- Exchange executed with conversion factors varying from 0.85 to 1.1; each instrument exchanged based on conversion factor with cash payments, without face value haircut, so adjusted face values matched the face value of the super-bond.

### Participation, legal mechanisms, and immediate aftermath (2007)
- Participation rate achieved: 98 percent after exercise of the collective action clause (CAC).  
- CAC triggered on the 9.75 percent note due 2015 (85 percent threshold under New York law) on February 5, 2007, increasing total eligible claims exchanged from 87 to 98 percent.  
- Remaining 2 percent of bondholders were not identified and did not initiate significant legal action despite not receiving debt service payments.  
- Step-up coupon structure anticipated to increase debt service by 0.6 and 1.2 percent of GDP in 2012 and 2013 respectively, contributing to decision to seek a second restructuring in 2012–13.  
- Despite consolidation to a single external bond and high creditor participation, solvency concerns remained; debt level stayed elevated with risks from contingent liabilities, implying substantial fiscal adjustment remained warranted.

### Box 1 — Collective Action Clause (CAC) in Belize 2006–07 restructuring: features and role
- CAC classifications (IMF, 2002b):
  - “Majority restructuring” provisions: allow a qualified majority of bondholders of an issuance to change financial terms and bind all holders of that issuance. Example supermajority thresholds commonly 75 percent.  
  - “Majority enforcement” provisions: can limit ability of minority bond holders to enforce rights following a default (acceleration and litigation).  
- Belize case specifics:
  - 9.75 percent bond (face value US$100 million due 2015) included a “majority restructuring” provision requiring written consent of holders owning at least 85 percent.  
  - Holders of 87.3 percent accepted Belize’s exchange offer, consenting to amendments matching old bond terms with those of the new bonds.  
- Notable features:
  - Belize required 85 percent threshold (many countries used 75 percent).  
  - Belize was the first sovereign in more than 70 years to use a CAC to amend payment terms of bonds in sovereign debt restructuring.  
- Creditor incentives to accept the 2006–07 exchange:
  - Return profile considered rewarding on a risk-adjusted basis; avoidance of costly litigation; illiquidity of original bonds.  
- IMF role:
  - Provided debt sustainability assessment and cash flow analysis; issued an assessment letter on December 20, 2006, noting high private creditor participation would support “orderly macroeconomic adjustment, restore fiscal and external sustainability, and establish the conditions for strong economic growth.”  
- Official financing received (not restructured):
  - Inter-American Development Bank: US$25 million.  
  - Caribbean Development Bank: US$25 million.  
  - Taiwan: US$30 million.  
  - Venezuela: US$50 million.

### Outcomes of 2006–07 restructuring (Box 1 summary)
- Average maturity of public external debt extended from 5.7 years before the exchange to 22 years after the exchange.  
- Debt service relief:
  - US$12 million (including missed interest payments) in 2007 (1 percent of GDP).  
  - About US$38 million (2.6 percent of GDP) per year from 2008 to 2012.  
- Debt stock and ratio:
  - No nominal haircut; outstanding debt remained high at 86 percent of GDP in 2007, declining to 77 percent of GDP by 2012.  
- Credit ratings and market reaction:
  - S&P raised long- and short-term debt from CCC- to B immediately after the exchange.  
  - Moody’s upgraded sovereign debt to B3.  
  - By completion of exchange on February 15, 2007, bond price recovered from 70 to 80 percent of face value.  
- Market access: Belize did not access international capital markets after the exchange; EMBI remained below 400 basis points for the next four months.  
- Debt management: no formal debt management and investor relations program established after restructuring; regular rigorous communication with foreign creditors was not maintained until negotiations for the second restructuring.

### 2012–13 restructuring — background, drivers, and process (summary)
- Post-2006–07 macro developments:
  - Central government interest payments dropped to about 16 percent of current revenues on average in 2007–11 compared with average 25 percent in preceding 5-year period.  
  - Gross financing needs declined to about 7½ percent of GDP in 2007–12, compared with 25 percent of GDP in 2002–06.  
  - Oil-related revenues increased from 0.2 percent of GDP in 2006 to 2.9 percent in 2011.  
  - Current account deficit narrowed to 4.7 percent of GDP on average in 2007–11 compared to average 13.3 percent in 2002–06.  
  - Gross international reserves improved from 2.1 months of imports in 2008 to 3.2 months on average in 2009–11.  
  - Real growth averaged 1.9 percent in 2007–11 compared with 5.4 percent on average in 2002–06.  
  - Two tropical storms in 2008 caused direct economic losses estimated at about US$75 million (5.4 percent of GDP) and negative balance of payments impact of US$46 million.  
- Pressures prompting new restructuring:
  - Super-bond step-up coupon: 4.25 percent in 2007, 6 percent in 2010, rising to 8.5 percent in 2012; implied about 0.6 percent of GDP in additional interest payments in 2012 and 1.2 percent in 2013.  
  - Contingent liabilities from nationalization of Belize Telemedia Limited (BTL) in 2009 and Belize Electricity Limited (BEL) in 2011; valuations ranged from 6 percent of GDP (government valuation) to 30 percent of GDP (former owners’ valuation).  
  - Several arbitral awards pending enforcement.  
  - 2011 Fund DSA indicated debt ratio would be elevated by 17 percent of GDP if fiscal contingent liabilities materialize.  
- Political and market context:
  - Prime Minister Barrow made restructuring an electoral issue in March 2012; bond price plunged to 40 percent of face value prior to restructuring announcement.  
- Negotiation timeline and actions:
  - Post-election appointment of a debt review team and advisors; June 20, 2012 update showed sizeable financing gaps from 2013 onwards.  
  - Creditor committee represented US$200 million of the super-bond, later coordinating groups represented over US$338 million (~62 percent of US$547 million outstanding).  
  - August 21, 2012: Government missed US$23 million coupon; S&P downgraded to a default rating.  
  - September 20, 2012: Partial coupon payment of US$11.7 million after 30-day grace period; creditor committee granted 60 more days.  
  - Negotiations focused on growth projections, contingent liabilities, and external official financing availability.  
  - November 21, 2012: Creditor committee proposed par bonds with more modest creditor NPV loss than authorities’ scenarios.  
  - High-level direct communication produced a framework agreement; exchange offer launched February 15, 2013; CAC (75 percent threshold under New York law) executed to raise participation from 86 percent to full participation. Operation closed March 20, 2013.

### 2012–13 indicative scenarios and final deal terms (summary)
- Final restructuring financial terms:
  - Approximately US$530 million of new 2038 bonds issued.  
  - Original super-bond subject to a 10 percent face value haircut; overdue interest added to the face value of the new bond (approximately 7 percent of the original principal).  
  - Net face value haircut about 3 percent.  
  - Coupon reduction: new bond pays a step-up coupon of 5 percent without grace period through 2017 (for 4.5 years) and 6.767 percent thereafter, compared with original 8.5 percent through maturity.  
  - Maturity extension: final maturity February 2038 (instead of 2029 under original terms). First amortization due August 2019.  
  - NPV haircut (discount rate 9.2 percent): 29 percent.  
  - Market haircut: 33 percent.  
  - Present value on 3/2013: Old 94%; New 67%.  
  - Missed coupon payments (August 2012 and February 2013) amounted to about US$35 million.

### Box 2 — Legal terms in 2012–13 exchange offer: provisions and market impact
- Legal provisions introduced or used:
  - Committee engagement provision: sovereign committed to recognize and engage with a Creditor Committee in specified circumstances (event of future default, events that would become default, or public announcement of intent to seek restructuring). Described as newly introduced and unique to Belize.  
  - Minimum participation threshold: set at 75 percent of aggregate principal amount of eligible claims; sovereign reserved right to cancel offer if threshold not met.  
  - Most-Favored-Creditor provision: prevents sovereign settling any other outstanding claim on better terms than offered to old bond holders.  
  - Principal reinstatement provision: automatic upward adjustment in principal in event of future default—upon default authorities issue additional exchange bond equal to 11.11 percent of outstanding principal as of original issuance within 5 business days after reinstatement date.  
  - Pre-funding of a Trustee Contingency Account for trustee expense reimbursement.  
  - Pari passu clause: clarified to mean equal ranking in legislation authorizing the exchange and in disclosure documents.  
- Immediate cash-flow and market outcomes:
  - Debt service relief of US$47 million (including missed interest payments) in 2013 (2.9 percent of GDP).  
  - About US$20 million (1.1 percent of GDP) per year from 2014 to 2017.  
  - Over remaining 16-year life of the original super-bond, total cash flow relief will be US$384 million.  
  - Bond price recovered from 60 to 65 percent of face value.  
  - S&P upgraded Belize to non-default rating (B-) on March 20; Moody’s upgraded from Ca to Caa2 on April 15.  
  - Creditor committee representation: 62 percent of the US$547 million outstanding.

### Debt sustainability implications, risks, and policy guidance
- Post-exchange debt trajectory and risks:
  - Debt exchange would reduce debt-to-GDP ratio by around 8 percent in 2018.  
  - Uncertainty on compensation payments to former owners of nationalized companies could increase debt by 17 percent of GDP at end-2015 and push financing needs above 6½ percent of GDP in 2016 and more than 7 percent of GDP after 2018.  
  - Ongoing uncertainty and looming contingent liabilities mean debt sustainability was not effectively restored following the two restructurings.  
  - Belize remained vulnerable to external shocks (including weather) and domestic shocks.  
- IMF staff illustrative fiscal guidance:
  - Raising gradually the primary surplus to 3 percent of GDP over the medium term—1 percent of GDP above the average over the last 10 years—would help reduce the debt-to-GDP ratio to less than 60 percent of GDP a decade from now and to below the long-term value of 50 percent of GDP by mid-2020s.  
- Institutional and policy responses:
  - Consideration of credit enhancements and guarantees (discussed negotiations with IDB; similar guarantees referenced: Seychelles US$10 million by African Development Bank in 2010; St. Kitts and Nevis US$12 million by Caribbean Development Bank in 2012).  
  - Government committed to modernize the debt management framework and adopt a robust medium-term debt management strategy.  
  - Policy recommendation emphasis: strong fiscal policy efforts and further fiscal consolidation required; smooth debt renegotiation alone does not guarantee successful outcomes—active macroeconomic policy adjustment is necessary.

*Source: Belize Debt Restructuring, 2006–07: Indicative Scenarios; Box 1 and Box 2 (excerpt).*

### 1. Belize Debt Restructuring, 2006–07: Indicative Scenarios ...................................................9

### Belize Debt Restructuring, 2006–07: Indicative Scenarios

### Overview and Motivation
- Government exchanged various external debt instruments, including loans and bonds, into one single U.S. dollar denominated bond (“super-bond”) with face value of US$547 million.  
- Exchange lengthened maturity and lowered coupon rates.  
- Restructuring undertaken in response to acute external liquidity shortage and high debt service burden; solvency concerns remained after the exchange.  
- The paper focuses on: Cause, Process, Outcomes.

### Cause — Macroeconomic Background and Triggers
- Public debt surged from 72 percent of GDP in 2000 to over 100 percent by 2003, with 95 percent of the total public debt outstanding held by external creditors.  
- Overall central government deficit rose from an average of 3 percent of GDP in 1996–98 to about 9 percent of GDP in 2000–04.  
- External current account deficits averaged 17.3 percent of GDP during 2001–2005.  
- External public debt rose from less than US$400 million in 1998 to US$1.1 billion in 2005.  
- Net international reserves fell below one month of import coverage by end-2005; improved from 0.6 to 1.4 months of imports after initial adjustment.  
- Maturity structure at end-June 2006: 13 percent of liabilities due within a year; 25 percent maturing in 1–5 years.  
- Average effective interest rate on external commercial borrowing at 11.25 percent.  
- Fiscal adjustment in 2005 reduced central government overall deficit from 8.6 percent of GDP in FY2004/05 to 3.3 percent in FY2005/06; primary balance shifted to a surplus of 3 percent of GDP.  
- Debt-to-GDP trajectory projected to fall from 98½ percent at end-2005 to 84 ½ percent in 2012, then shift back upward without sustained primary surpluses.

### Process — Negotiation, Participation, and Scope
- Government announced intention to restructure in August 2006; appointment of financial and legal advisors occurred in fall 2005.  
- Restructuring targeted only external commercial debt; T-bills, domestic loans, and bilateral and multilateral claims were excluded.  
- Creditor committee formed representing holders of at least 51 percent of affected debt; committee included named institutional members (see source).  
- Broad-based creditor engagement and transparent dissemination of macroeconomic data facilitated negotiations. Authorities maintained close contact with over 40 creditors who held more than 80 percent of the face value of total restructured debt.  
- Some coupon payments were missed during negotiation stage (missed payments to two special purpose vehicles in mid-September 2006), but the restructuring is characterized as preemptive with temporary arrears.  
- Launch of offer: December 18, 2006. Eligible commercial debt comprised: (i) US$348 million global bonds (including notes); (ii) bank notes for US$53 million; and (iii) two insured loans valued at US$115 million.

### Indicative Scenarios Presented to Creditors (October 2006)
- Option: Discount; Discount; Par  
- Face value haircut: 20% ; 20% ; 0%  
- Grace period (years): 8 13 12  
- Final maturity (years): 18 13 22  
- Coupon scenarios (as presented):
  - Discount option 1: 2.5% until 2010; 4.5% until 2012; 9% until 2025  
  - Discount option 2: 2.5% until 2010; 4.5% until 2012; 9% until 2020  
  - Par option: 2% until 2010; 3.5% until 2013; 7% until 2029  
- Repayment style: Amortizing; Bullet; Amortizing

### Deal Structure and Financial Terms (Final Exchange)
- New instrument: “Super-bond” (single external bond).  
- Face value of new bond issued: US$547 million (no principal haircut on aggregate).  
- Composition of exchanged old instruments (face values): Global bonds/notes US$348 million; Bank loans US$53 million; Insured loans US$115 million.  
- Maturities of old instruments: 2007–15 (global bonds/notes); 2008–12 (bank loans); 2010–15 (insured loans). New bond maturity: 2029.  
- Grace period for new bond: 12 years; amortization commencing in August 2019.  
- Remaining maturity (weighted averages) of old instruments: 6.2; 4.4; 5.8 years; new instrument remaining maturity: 22 years.  
- Coupon structure:
  - Old instruments (weighted/representative): Fixed 8.95–9.95% (global); Fixed 9.25–10% (bank loans); Fixed 10% (insured loans).  
  - New super-bond: 4.25% until 2010, 6% until 2012, 8.5% until maturity (step-up coupon).  
- Average coupon rates of new bond over maturity are lower by 2.1 percent than those of the old instruments on average.  
- Maturity extension: extended by 16 years on average; conversion from mostly bullet (85 percent of outstanding previously) to amortizing structure.  
- Present value on 2/2007 (by old instrument category): Global bonds/notes 102/104%; Bank loans 103%; Insured loans 105%; Super-bond 79% (source table formatting).  
- NPV haircut (using discount rate of 9.2 percent): 24 percent overall (paper notes "Using a discount rate of 9.2 percent, the NPV haircut was 24 percent, while the market haircut was 21 percent.").  
- Market haircut: 21 percent overall.  
- NPV haircuts differ across creditors; NPV losses for holders of insured loans were 50 percent higher than those of global bonds and notes due to lower exchange ratio.  
- Exchange executed with conversion factors varying from 0.85 to 1.1; each instrument exchanged based on conversion factor with cash payments, without face value haircut, so adjusted face values matched the face value of the super-bond.

### Participation, Legal Mechanisms, and Aftermath
- Participation rate achieved: 98 percent after exercise of the collective action clause (CAC).  
- CAC triggered on the 9.75 percent note due 2015 (85 percent threshold under New York law) on February 5, 2007, increasing total eligible claims exchanged from 87 to 98 percent.  
- Remaining 2 percent of bondholders were not identified and did not initiate significant legal action despite not receiving debt service payments.  
- Step-up coupon structure anticipated to increase debt service by 0.6 and 1.2 percent of GDP in 2012 and 2013 respectively, contributing to decision to seek a second restructuring in 2012–13.  
- Despite consolidation to a single external bond and high creditor participation, solvency concerns remained, and debt level stayed elevated with potential risks from contingent liabilities, implying substantial fiscal adjustment remained warranted.

*Source: Belize Debt Restructuring, 2006–07: Indicative Scenarios (excerpt).*

### Box 1. Collective Action Clause in Belize 2006-07 Restructuring

### Box 1. Collective Action Clause in Belize 2006-07 Restructuring

### Collective Action Clauses (CACs): types and Belize application
- CACs classified into two broad categories (IMF, 2002b):
  - “Majority restructuring“ provisions: allow a qualified majority of bondholders of an issuance to change bonds’ financial terms (principal, interest, and maturity) and bind all holders of that issuance, either before or after default. For most recently issued bonds with CACs, a supermajority is reached when bondholders holding a certain percentage of total outstanding debt agree (e.g., 75 percent).
  - “Majority enforcement” provisions: can limit the ability of minority bond holders to enforce rights following a default; a qualified majority can prevent individual bondholders from (i) declaring the full amount of bond due and payable (“acceleration”), and (ii) commencing litigation against the sovereign.
- Belize case (first half of 2003 under New York law):
  - Issued a 9.75 percent bond with face value of US$100 million due 2015 that included a “majority restructuring” provision with written consent of holders owning at least 85 percent of the notes.
  - Holders of 87.3 percent of the bond accepted Belize’s exchange offer, thereby consenting to the amendments, which included matching the terms of the old bonds with those of the new bonds.
- Two key CAC features in Belize 2006–07 (Buchheit and Karpinski, 2007):
  - Most countries used a 75 percent threshold to amend terms of bonds with majority restructuring clauses; Belize required 85 percent.
  - Belize was the first sovereign in more than 70 years to use a CAC to amend the payment terms of bonds in sovereign debt restructuring.

### Creditor incentives, IMF role, and official financing in 2006–07
- Reasons creditors accepted the 2006–07 exchange despite concerns about future debt distress:
  - They thought the return profile was rewarding enough based on risk-adjusted assessment given global environment.
  - Economic sense to accept offer rather than undertake costly legal actions.
  - Original bonds were illiquid, making outright sales difficult.
- IMF engagement:
  - Played role as independent party providing debt sustainability assessment and cash flow analysis.
  - Maintained close contact with authorities and financial advisors, but not with creditors during the restructuring.
  - 2006 Article IV consultation highlighted projected large financing gaps over the medium term and provided inputs into authorities’ adjustment scenario (IMF, 2006a).
  - At authorities’ request, IMF issued an assessment letter on December 20, 2006, noting high private creditor participation would help support “orderly macroeconomic adjustment, restore fiscal and external sustainability, and establish the conditions for strong economic growth.”
- Official multilateral and bilateral financing received (not restructured):
  - Inter-American Development Bank: US$25 million.
  - Caribbean Development Bank: US$25 million.
  - Taiwan: US$30 million.
  - Venezuela: US$50 million.

### Outcomes of 2006–07 restructuring: liquidity relief and remaining solvency concerns
- Average maturity of public external debt:
  - Extended from 5.7 years before the exchange to 22 years after the exchange.
- Debt service relief:
  - US$12 million (including missed interest payments) in 2007 (1 percent of GDP).
  - About US$38 million (2.6 percent of GDP) per year from 2008 to 2012.
- Debt stock and ratio:
  - No nominal haircut; outstanding debt remained high at 86 percent of GDP in 2007, declining to 77 percent of GDP by 2012.
- Credit ratings and market reaction:
  - Standard and Poor’s (S&P) raised Belize’s long- and short-term debt from CCC- to B immediately after the exchange.
  - Moody’s upgraded Belize’s sovereign debt to B3.
  - By completion of exchange on February 15, 2007, bond price recovered from 70 to 80 percent of face value, close to pre-announcement level.
- Market access and post-exchange behavior:
  - Belize did not access international capital markets after the exchange.
  - EMBI remained below 400 basis points for the next four months.
  - Continued reliance on official project financing and the global financial crisis prevented new external commercial debt issuances.
- Debt management and investor relations:
  - No formal debt management and investor relations program established after the restructuring; regular rigorous communication with foreign creditors was not maintained until negotiations for the second restructuring.

### 2012–13 restructuring: background and drivers
- Context after 2006–07:
  - Central government interest payments dropped to about 16 percent of current revenues on average in 2007–11 compared with average 25 percent in preceding 5-year period.
  - Gross financing needs declined to about 7½ percent of GDP in 2007–12, compared with 25 percent of GDP in 2002–06.
  - Oil-related revenues increased from 0.2 percent of GDP in 2006 to 2.9 percent in 2011.
  - Current account deficit narrowed to 4.7 percent of GDP on average in 2007–11 compared to average 13.3 percent in 2002–06.
  - Gross international reserves improved from 2.1 months of imports in 2008 to 3.2 months on average in 2009–11.
  - Real growth averaged 1.9 percent in 2007–11 compared with 5.4 percent on average in 2002–06.
  - Two tropical storms in 2008 caused direct economic losses estimated at about US$75 million (5.4 percent of GDP) and negative balance of payments impact of US$46 million.
- Pressures leading to new restructuring:
  - Step-up coupon on the “super-bond”: 4.25 percent in 2007, 6 percent in 2010, rising to 8.5 percent in 2012; implied about 0.6 percent of GDP in additional interest payments in 2012 and 1.2 percent in 2013.
  - Additional contingent liabilities from nationalization of Belize Telemedia Limited (BTL) in 2009 and Belize Electricity Limited (BEL) in 2011; valuations ranged from 6 percent of GDP (government valuation) to 30 percent of GDP (former owners’ valuation).
  - Several arbitral awards pending enforcement related to land acquisition, overpayment of taxes, and non-observance of tax agreements.
  - Fund DSA in 2011 indicated debt ratio would be elevated by 17 percent of GDP if fiscal contingent liabilities materialize.
- Political context:
  - Prime Minister Barrow made restructuring of the “super-bond” an electoral issue in March 2012 general election.
  - Bond price plunged to 40 percent of face value prior to restructuring announcement.

### 2012–13 restructuring: process and negotiation dynamics
- Early actions:
  - Post-election, appointment of a debt review team and engagement of financial advisors and legal advisors.
  - Authorities identified additional liabilities from nationalizations and onerous step-up coupon as drivers; negotiations with former owners stalled so government focused on coupon-related debt burden.
  - June 20, 2012 economic and financial update showed sizeable financing gaps from 2013 onwards.
- Creditor coordination and response:
  - Bondholders formed a creditor committee representing US$200 million of the “super-bond” (later the Coordinating Committee and an ad-hoc group represented over US$338 million, about 62 percent of the US$547 million outstanding).
  - Committee rejected authorities’ first indicative scenarios (August 2012) that implied substantive face value and NPV haircuts with coupon reduction and maturity extension.
- Missed and partial coupon payments:
  - August 21, 2012: Government missed a US$23 million coupon payment; S&P downgraded country to a default rating.
  - September 20, 2012: After 30-day grace period, authorities made a partial coupon payment of US$11.7 million; creditor committee granted 60 more days to conclude negotiations.
- Negotiation focus (early October 2012 onward):
  - Focused on growth projection, potential additional liabilities from nationalizations, and availability of external official financing—essential to determine financing gaps and creditor losses.
  - November 21, 2012: Creditor committee proposed par bonds with more modest creditor NPV loss than authorities’ scenarios.
  - Authorities revised scenarios with lighter face value haircut and higher coupon; committee rejected revised scenarios.
  - High-level direct communication between Mr. Barrow and creditor committee co-chair led to framework agreement.
  - Exchange offer launched on February 15, 2013; CAC (75 percent threshold under New York law) was executed to raise participation from 86 percent to full participation. Operation closed on March 20, 2013.

### 2012–13 restructuring: indicative scenarios and final deal terms
- Initial and Revised Indicative Scenarios (summary from Table 3):
  - Initial Indicative Scenarios (Aug 9):
    - Options with Par/Discount structures, Face value haircut 0%/45%/45%/0%/33%; Grace period (years) 1/5/0/5/10/5? (table layout complex in source); Final maturity (years) 50/30/30/40/30; Coupon configurations included 2% and alternatives (detailed tabulation in source).
  - Revised Indicative Scenarios (Nov 29): presented alternate par/discount, grace, maturity, coupon, and repayment styles (detailed tabulation in source).
- Final restructuring financial terms (Table 4 & text):
  - Principal haircut and issuance:
    - Approximately US$530 million of new 2038 bonds issued.
    - Original “super-bond” subject to a 10 percent face value haircut, but overdue interest was added to the face value of the new bond (approximately 7 percent of the original principal).
    - Net face value haircut about 3 percent.
  - Coupon rate reduction:
    - New bond pays a step-up coupon of 5 percent without grace period through 2017 (for 4.5 years) and 6.767 percent thereafter, compared with original 8.5 percent through maturity.
  - Maturity extension:
    - Final maturity February 2038 (instead of 2029 under original terms).
    - First amortization due August 2019.
  - NPV and market haircuts:
    - Using a discount rate of 9.2 percent, NPV haircut was 29 percent.
    - Market haircut was 33 percent.
  - Additional numeric details from Table 4:
    - Old instrument: 2029 US bond; New instrument: 2038 US bond.
    - Face value (US$ mil.): Old 547; New 530.
    - Face value haircut: 3% (10%) 1/-
    - Remaining maturity (years): Old 16; New 25.
    - Coupon: Old 4.25% until 2010, 6% until 2012, 8.5% until maturity; New 5% until 2017, 6.767% until maturity.
    - Repayment profile: Old 2019-29; New 2019-38.
    - Present value on 3/2013: Old 94%; New 67%.
    - NPV haircut 3/29% - .
    - Market haircut 4/33% - .
    - Footnotes:
      - 1/ Face value haircut was 10 percent. Adding the missed coupon payments to the face value, the net face value haircut is 3 percent.
      - 2/ Discount rate at 9.2 percent which was exit yield at completion of exchange (on 3/28/2013 - the first transaction day when yields were recorded after completion of exchange).
      - 3/ NVP is defined as 1 - Present value of new debt/Present value of old debt as in Sturzenegger and Zettelmeyer (2008). Present value of new debt and old debt is computed with the same discount rate.
      - 4/ Market haircut is defined as 1 - Present value of new debt/Face value of old debt.
    - Missed coupon payments (August 2012 and February 2013) amounted to about US$35 million.
- New legal and contractual terms introduced:
  - Committee engagement provision to augment contract enforceability and maintain close engagement if the government experiences difficulties to service its debt obligations (notable given no IMF-supported program in place).
  - Contingency account for trustee indemnification.
  - Principal reinstatement in the event of a future default.
  - Most favored creditor provision.
  - Clarification of pari passu clause to mean equal ranking in the legislation authorizing the exchange and in the exchange offer (clarified in disclosure documents rather than modifying instrument terms).
  - Government committed to improve data transparency via “best effort” to begin subscribing to the Special Data Dissemination Standard (SDDS).

*Source: Box 1. Collective Action Clause in Belize 2006-07 Restructuring (_wp14132).*

### Box 2. Legal Terms in 2012-13 Exchange Offer

### Box 2. Legal Terms in 2012-13 Exchange Offer

### Legal provisions introduced or used in the 2012–13 exchange offer
- Committee engagement provision
  - Commitment from the sovereign debtor “to recognize and to engage with a Creditor Committee” in (i) the event of a future default, (ii) any event or circumstance which would, with the giving of notice, lapse of time, the issuing of a certificate and/or fulfillment of any other requirement, constitute an event of default, or (iii) any public announcement by the debtor to the effect that the debtor is seeking or intends to seek a restructuring of the securities (whether by amendments, exchange offer or otherwise).
  - Described as newly introduced and unique to Belize case.
- Minimum participation threshold
  - Ensures a high number of bondholders agree on exchange offer.
  - Sovereigns reserve the right, in its sole discretion, to cancel the proposed offer if participation would not exceed the threshold.
  - In Belize’s case, this minimum threshold was set at 75 percent of the aggregate principal amount of the eligible claims.
- The Most-Favored-Creditor provision
  - Prevents the sovereign debtor from settling any other outstanding claim on better terms than those offered to holders of the old bonds.
- Principal reinstatement provision
  - Automatic upward adjustment in principal in the event of a future default.
  - Upon a default, the authorities shall issue to each holder of the exchanged bond within 5 business days after the principal reinstatement date an amount of additional exchange bond equal to 11.11 percent of the outstanding principal amount of exchange bond as of the date of original issuance of the new bonds.
- Pre-funding of a Trustee Contingency Account
  - Sovereign debtor pays the funding of Contingency Account which is available for reimbursement of expenses of the Trustee of New Bonds.
- The Pari Passu clause
  - Ensures the borrower does not have, nor will it subsequently create, a class of creditors whose claims against the borrower will rank legally senior to the indebtedness represented by the loan agreement.

### Immediate outcomes and market reaction
- Cash-flow relief and timing
  - Debt service relief of US$47 million (including the missed interest payments) in 2013 (2.9 percent of GDP).
  - About US$20 million (1.1 percent of GDP) per year from 2014 to 2017.
  - Over the remaining 16-year life of the original “super-bond”, total cash flow relief will be US$384 million.
  - Belize will face continuous liquidity needs over the long term until 2038, indicating need for frontloaded macroeconomic adjustment policies.
- Credit ratings and bond prices
  - S&P upgraded Belize to non-default rating (B-) on March 20 given expected completion of the debt exchange.
  - Moody’s upgraded Belize from Ca to Caa2 on April 15, reflecting an improvement in the government’s liquidity position.
  - Bond price recovered from 60 to 65 percent of the face value.
- Creditor committee representation
  - Representation of the creditor committee was 62 percent of the US$547 million of bonds outstanding.

### Debt sustainability implications and risks
- Medium- and long-term debt trajectory
  - Debt exchange would reduce the debt-to-GDP ratio by around 8 percent in 2018.
  - Uncertainty about compensation payments to former owners of two nationalized companies:
    - Compensation payments could increase the debt level by 17 percent of GDP at end-2015.
    - Could push up financing needs to above 6½ percent of GDP in 2016.
    - Could push financing needs to more than 7 percent of GDP after 2018.
  - Despite favorable ceteris paribus post-restructuring path, debt sustainability remains at risk without active fiscal adjustment.
- IMF staff illustrative fiscal policy guidance (from cited IMF material)
  - Raising gradually the primary surplus to 3 percent of GDP over the medium term—1 percent of GDP above the average over the last 10 years—would help reduce the debt-to-GDP ratio to less than 60 percent of GDP a decade from now and to below the long-term value of 50 percent of GDP by mid-2020s.
- Additional fiscal vulnerabilities
  - Ongoing uncertainty and looming additional fiscal contingent liabilities mean debt sustainability has not been effectively restored following the two restructurings.
  - Belize remains vulnerable to external shocks (including weather) and domestic shocks.

### Institutional and policy responses
- Consideration of credit enhancements and guarantees
  - Authorities initially considered an operation with the IDB to fund a partial guarantee.
  - Similar guarantees in other cases: guarantees of US$10 million to Seychelles in 2010 by the African Development Bank and of US$12 million to St. Kitts and Nevis in 2012 by the Caribbean Development Bank.
  - Negotiations with IDB evolved; alternative support options were discussed as bondholder negotiations intensified toward end-2012.
- Debt management reform
  - The government committed to “modernize” the debt management framework after the debt restructuring.
  - Robust debt management scheme with solid medium-term debt management strategy is viewed as necessary to monitor risks in the public debt portfolio.
- Policy recommendation emphasis
  - Strong fiscal policy efforts and further fiscal consolidation are warranted to achieve debt sustainability and reduce future financing needs.
  - Smooth debt renegotiation alone does not guarantee successful outcomes; active macroeconomic policy adjustment is required.

*Source: Box 2. Legal Terms in 2012-13 Exchange Offer*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2014/_wp14132.pdf_