Creditors face loss in Grenada debt deal

By Robin Wigglesworth, Capital Markets Correspondent


Grenada’s commercial lenders are facing a “substantial” hit as the small, stricken Caribbean country prepares to restructure one of the biggest debt burdens in the world.

The tiny tropical island is known for a US invasion to topple a socialist junta in 1983, and its biggest export is nutmeg. But the country has been economically and financially stricken since Hurricanes Ivan and Emily hammered the island in 2004.

The hurricanes killed 39 people, in a country with just 100,000 inhabitants, and caused damage equal to twice the island’s gross domestic product.

Grenada restructured its debts in 2005, but economic growth has remained elusive, and tourism has dipped since the financial crisis.

Talks with the holders of Grenada’s $193m bond – just a slice of its roughly $1bn debts – have started in earnest, but a person familiar with the situation warned that creditors should gird themselves for big losses, given the scale of Grenada’s indebtedness, decrepit finances and economic weakness.

“These guys will need a substantial haircut,” the person said.

“Otherwise they will just end up doing it again in a few years’ time.”

Grenada is the fourth Caribbean country forced to renegotiate its

debts over the past year. Many of the small island and coastal statelets are struggling with big budget deficits and heavy debt burdens, and Grenada’s public debts are larger than its annual economic output.

“Many of us are in a situation where the public debt overhangs have become so large that they act as a binding constraint on growth and investment,” Keith Mitchell, Grenada’s prime minister, told the FT in a statement.

The “haircut” is likely to be much more severe than the 10-20 percent effective loss that Belize’s lenders accepted this year, and

closer to the loss of roughly 50 per cent imposed on the creditors of St Kitts and Nevis when the Caribbean island federation restructured last year,

Stuart Culverhouse, chief economist at Exotix, a boutique brokerage that specialises in unusual markets, predicted that the haircut is likely to be at least 30 per cent.

“Grenada has a solvency issue,” he said. “Growth is low and it is running out of cash, so a harsh treatment [of creditors] is probably necessary.”

Grenada’s biggest bondholder is Franklin Templeton, the giant California-based asset manager. Behind that are Grantham Mayo van Otterloo, or GMO, and T Rowe Price, two other well-known international fund managers.

The person close to the matter said that creditors had few cards to play, given the country’s lack of cash. Regardless of the restructuring, Grenada faces a wrenching budget adjustment, at a time when the unemployment rate is already more than 30 per cent.

“Creditors may initially take a tough line, but Grenada always has

the option simply to sit it out,” he said. “Recovery through litigation is unlikely to be a serious proposition for bondholders.”

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