Sunday, March 3, 2013

Please Buy My Bonds.....

Honduras is broke.

It can't pay government employees, contractors, or suppliers.  Its not unusual for teachers to go six months between paychecks under Porfirio Lobo Sosa.  Road construction has stopped again due to government debts to the construction companies.  It stopped paying the IHSS, the government health provider, the fees it collected from government employees to pay for their health care, prompting IHSS to threaten to cut off government employees.

So what does a bankrupt government do?

Honduras is now seeking to privately place over $750 million dollars in bonds.  In that private placement, it is using Barclays and Deutsche Bank as its agents.  These two banking firms have been hired by the government of Honduras to set up meetings with potential investors.  Meetings have now been set up in London (March 4), New York (March 6), Boston (March 6) and Los Angeles (March 7).

But there's a last minute hitch. Congress, which had to vote to allow the issuance of these bonds, changed the term from 8 years to 10 years.  This increases the amount the government of Honduras will have to pay out to investors by prolonging interest payments for two more years.

If that wasn't enough, both Moody's and Standard and Poor's dropped Honduras's bond rating this week because of what they called the risk of investing in a country where there the government cannot pay its existing debts.  Moody's also changed their outlook from "stable" to "negative".  This in turn will raise the interest rate that Honduras will have to pay on the bonds.  Moody's indicated that the downgrade was caused by
a worsening in the external finances of the country's economy, reflected in an increase of the deficit which is only partially covered by foreign direct investment.
The public debt in Honduras, according to Moody's, is about 35% of its gross domestic product, which is moderate. 

But that is not the whole story. Because of the temporary cessation of international funding under the de facto regime that ruled in 2009 following the June coup d'etat, the country had to rely on internal credit markets, which were costlier, raising the government's debt payment burden.  Debt service (principal and interest payments) was about 10% of the budget last year, up from 3% of the budget in 2008.  Much of this increase is due to the debt shift from external to internal credit markets under the seven month de facto regime.  Both Moody's and Standard and Poor's cited the increased costs from using internal credit markets in their downgrades.

So off to market with $750 million dollars in bonds with a newly downgraded credit rating and an extended term of payment, just a week before the private placement meetings kick off in Europe and North America. Not the kind of bargaining position anyone would like to be in.


Oliverio del occidente said...

All fair points and given the trend in Honduras' debt (which has more than doubled since 2008) you could certainly question whether a huge issue is wise. But having explained that debt costs have rocketed because of a shift from internal to external funding, surely you cannot criticise the government for looking abroad?

Honduras is likely to obtain much cheaper funding in the international markets than in the domestic markets. Guatemala just sold 15-year money at 5%, Bolivia and Paraguay sold 10-year money at under 5%. These last two are only rated one notch above Honduras.

The reality is that emerging bond investors have shedloads of cash thanks to low rates in developed economies, meaning it is historically a very good time to go to market. That S&P link puts domestic debt costs at 14% - much higher than Honduras will obtain in dollars, even accounting for the costs of a currency swap and the juicy fees Barclays and Deutsche Bank will take from the public purse for their work.

Also, apologies for pedantry, but Moody's and S&P did not downgrade Honduras, rather placed the ratings on a negative outlook. Not ideal just before investor meetings, but not the same as a downgrade.

I profess to relative ignorance about Honduras however and have based this on what I've read around the bond issue, so please feel free to offer colour to contradict me.

RNS said...

Oliverio, I did not criticize the Honduran government for going abroad to sell its bonds. The domestic credit market is way to expensive.

However, using Guatemala's recent experience isn't a guide either. Guatemala's debt is less than 3% of GDP and has a better credit rating than Honduras. I believe expectation is that Honduras will get a rate somewhere around 7% on the dollar amount of the bonds.

And I have to contradict you about Moody's and S&P. One of them downgraded Honduras from Baa2 to Baa3 in addition to changing them from "stable" to "negative". In any event, the press that called it a downgrade. Regardles of what you call it, it affects their cost of borrowing negatively.