2020-04-01 Bloomberg Markets Magazine

(Jacob Rumans) #1
Fieser is a credit market reporter based in Bogotá.

the government, without the clause, might default on its debts
following a big storm.
Creditors didn’t buy it. Several institutional bondholders
formed a committee, including Eaton Vance Corp., Greylock Capital
Management, Teachers Advisors, and the Guyana Bank for Trade
& Industry. The group wanted Barbados to consider an alternative
approach, such as an insurance policy, says Rafael Molina, managing
partner at Newstate Partners LLP, an advisory firm in London for
the creditors. “I can understand the government of Barbados is
concerned about hurricanes, because the threat of climate change
is very real,” he says. “But from the beginning, creditors said they
didn’t want this clause. There is no market for bonds with these
clauses. It has to be driven by the market.”
Mottley took a hard-line approach. Negotiations dragged
on and at times appeared stalled. Having secured a $290 million
bailout package from the International Monetary Fund, she could
afford to bide her time because Barbados didn’t necessarily need
to borrow from capital markets.
In the end, fatigue set in, Molina says. Despite the creditors’
objection to the clause and to other government demands, they
wanted to close the deal. “The thought was, Do we really want this
to drag on for two years? We’ll just take it and move on,” he says.
The creditor committee accepted the government’s deal,
with one caveat designed to make the bonds more salable: If natural
disaster strikes, Barbados has to notify creditors of its intent to
enact the clause. If a committee majority votes against its use, it
can’t be enacted.
The wrangling over the Barbados deal exposed a weakness
that may inhibit widespread use of Mottley clauses: The market
hasn’t figured out how to price the risk in such cases. So far, though,
investors seem welcoming. Similar bonds issued by Grenada were
trading around par before the March credit sell-off. Buyers have
actually pushed up the price for the new Barbados dollar bond,
which matures in 2029 and carries a 6.5% coupon, since it started
trading in December.

Just as Barbados built on Grenada’s experience, other coun-
tries may build on Mottley’s. As they consider ways to balance the
needs of countries and creditors alike, the IMF and World Bank
have held discussions on the clauses. In the Bahamas, where
Hurricane Dorian caused $3.4 billion in losses and damages, the
government has considered a similar provision in new debt sales.
For now, the clauses are “experimental,” says Michael
Papaioannou, a visiting scholar at Drexel University in Philadelphia
and an expert on emerging-market debt. They could become
common if multilaterals such as the World Bank and IMF include
them in loan contracts. “We are seeing the first steps,” he says.
Barbados is determined to keep taking them. Although wide-
scale acceptance of the clauses “will take a while,” Persaud says,
Barbados plans to include the clause in all future debt sales, blazing
a path for other governments. “It does require a few pioneers,” he
says. “Financiers love to let someone else be first. They get paid a
lot of money, but they’re risk-averse.”

ON A JANUARY afternoon in Bridgetown, Mottley gathers her cabinet
together to go over the numbers for the coming budget year. She
whips out an iPad to check spreadsheets that show debt has declined
to 114% of GDP from about 176% when she took office. She points
to a part of the spreadsheet that shows how much the country will
save if it has to enact the hurricane clause—a bit of certainty amid
the wild unpredictability of climate change.
Outside, a steady, light rain is falling. It’s a welcome respite
from a punishing dry spell. But even this relatively small amount of
precipitation is inundating streets that have never flooded before.
“Even without hurricanes you have normal floods,” she tells the
room. She mentions that it’s been six decades since a catastrophic
hurricane struck the island. She turns to a wooden tabletop and raps
it with her knuckles. “Barbados has been luckier than most.”

“It does require a few pioneers.
Financiers love to let someone else be first. They get paid
a lot of money, but they’re risk-averse”

VOLUME 29 / ISSUE 2 69
Free download pdf