Investors take fresh look at Jamaica after deal

Fri Feb 15, 2013 2:19pm EST

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Feb 15 (IFR) - International investors were taking a fresh look at Jamaica on Friday after it agreed a $750m loan programme with the IMF as part of a second domestic debt restructuring in three years.

Even though announcement of the debt exchange this week led to downgrades on Jamaica's ratings, the country's external debt - exempt from the swap - was trading up on Friday.

Its most liquid dollar bonds - the 8% 2019s and 8% 2039s - were about a half point up in trade at 96.00-98.00 and 88.00-90.00, respectively.

"Jamaica has demonstrated yet again that it considers foreign law external bond debt as senior obligations to anything domestic," said Carl Ross, managing director of investments at Oppenheimer.

While cutting coupons on domestic bonds will make the external debt look more attractive, Ross said that Jamaica may have missed the chance for a more comprehensive restructuring - which it may yet have to undertake down the road.

But he said any IMF deal could help the island nation put its public finances on stable footing and at the least would provide some breathing space.

The IMF for its part said the debt exchange would "help reduce Jamaica's medium-term financing needs and contribute to debt sustainability".

The government hopes to cut debt from 140% of GDP to 95% over the next seven years, and raise the primary surplus to 7.5%.

For every dollar in the budget, Jamaica currently spends 55 cents on debt and 25 cents on wages - leaving just 20 cents for other services such as schools, roads and hospitals.

"This offer, which we urge bondholders to accept, will make possible the reduction of our debt-to-GDP ratio by 8.5% or around US$17bn per year between now and 2020," Finance Minister Peter Phillips in an address to the nation earlier this week.

GOING FAR ENOUGH?

Like Ross, JP Morgan analyst Franco Uccelli wondered if the country had perhaps missed a golden opportunity.

"While we view [the debt exchange] as a step in the right direction, we cannot help but wonder if, as in the case of the first domestic exchange, it may not be enough to guarantee the country's long-term fiscal sustainability given its inability to post healthy growth," Uccelli wrote in a report this week.

The government is offering to exchange Jamaican dollar (J$) notes for those with longer tenors and reduced coupon, or interest, payments.

"In our view, the offer implies that investors will receive less value than promised as per the original securities based on the lower interest rate and maturity extension - an average increase of five years," said S&P analyst Joydeep Mukherji.

"We view this offer as distressed rather than opportunistic, because the issuer does not intend to fulfill its original obligations."

The government's debt burden is expected to remain around 115% of GDP this year, despite the reduction in debt servicing needs after the exchange. At the same time, net international reserves stood at US$1bn at the end of January, down from more than US$1.9bn in early 2012.

Citigroup, which worked on the country's last debt swap, has also been mandated on this occasion. The transaction expires on February 21.

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