Situated on the east coast of Central America, Belize is a small country of less than half a million people that is renowned for its outstanding natural beauty. The jewel in the crown is the Belize Barrier Reef, which is the world’s second biggest coral reef system after Australia’s Great Barrier Reef. Dotted with hundreds of low-lying islands called ‘Cayes’, the Reef hosts incredibly rich marine life, which has helped to make Belize a magnet for tourism. Indeed, the Belize economy is heavily reliant on tourism, which in recent years has accounted for around 40% of the country’s GDP and 60% of its foreign-exchange earnings.

Severe Covid-19 shock and default

In this context, the collapse in global tourism due the Covid-19 pandemic inevitably had a devastating impact on Belize. Its economy shrank by 14.1% in 2020. Tax revenues dried up and pandemic-related spending surged. Public debt-to-GDP jumped from 98% in 2019 to 126% in 2020¹. Belize’s ability to service its external debt, in particular its $533 million 2034 ‘superbonds’, became impossible. In 2020, bondholders provided much-needed cashflow relief to the government by agreeing to add ‘due coupon’ interest payments to the total amount owed (i.e. ‘capitalisation’ of coupons).

Restructuring efforts

In 2021, in order to give time to find a restructuring solution, bondholders further agreed to extend the grace period for the coupon interest payment due in May. After months of intensive negotiations, on 13 September 2021, the Belize government and the bondholder committee, of which abrdn was a key member, finally found a viable restructuring solution. The resulting agreement was subject to a ‘collective action clause’, which required at least 75% of bondholders' approval for the deal to progress². On 24 September 2021, this was achieved with the Belize government confirming it had received support for its tender offer from bondholders representing 84.4% of the aggregate principal amount of the bonds.

A unique and innovative ocean-friendly restructuring

Under the terms of the agreement, bondholders agreed to reduce the principal value (i.e. the total amount owed by Belize) by 45%. Unusually for sovereign distressed restructuring agreements, which typically involve the issuance of new bonds to existing bondholders, the Belize government offered to buy back all its bonds for cash. However, the highly innovative part of the deal was the government committing to ‘durable marine conservation efforts and sustainable marine-based economic activity’. More specifically, as part of this Belize committed to funding a $23 million endowment to support future marine conservation projects.

The not-for-profit US environmental organisation Nature Conservancy (TNC) was a critical facilitator of the restructuring deal. The money for the Belize government’s bond buyback will come from TNC’s ‘Blue Bonds for Ocean Conservation Programme’. This initiative enables private sector capital to refinance the public debt of countries signing up for ocean conservation work.

A ‘win-win’ for Belize, investors and the reef

The innovative debt restructuring has been described as a ‘win-win’. For Belize, the new blue bond arrangement is financially preferable and demonstrably supports the long term security of its reef. For bondholders, they were able to achieve competitive recovery value, while securing some important environmental benefits. The funding condition for the TNC-backed endowment in particular adds a measure of credibility that Belize’s environmental commitments will go well beyond mere words.

A template for the future sovereign debt restructurings?

We think the Belize example can serve as a template for future pro-green sovereign debt restructurings. On the one hand, it is sadly quite likely that other less developed countries (LDCs) with significant environmental vulnerabilities will experience economic shocks that severely impact their credit standing. On the other, ESG/responsible investing is arguably one of the most important structural trends in investing. As in the Belize example, serious ESG bond investors will certainly welcome the opportunity to tangibly demonstrate a willingness to look beyond the bottom line and make a positive difference.

The Belize example can be classed as a type of ‘debt for nature swap’ transaction which could have particular relevance for climatically and environmentally challenged LDCs, such as the Maldives, Costa Rica and Sri Lanka. However, it is also not inconceivable that in time similar innovative sovereign restructurings could potentially be explored for the S and G parts of ESG.

Final thoughts…

Belize’s recent sovereign debt restructuring deal was successful in reducing debt servicing costs. This freed up money for more productive uses and helped the government deal with the ongoing effects of the pandemic. At the same time, the deal included binding provisions that should help preserve Belize’s marine environment. With a growing interest in responsible investing, including among emerging market debt investors, we think the Belize example can help inform similar successful debt restructurings in the future.