The tiny Caribbean island nation of Grenada, with a population near 100,000, may be a bond investor’s nightmare that could also point to a solution for sovereign nations drowning in debt.

Grenada Sovereign Debt

Bond holders, including one “vulture investor,” take a 50 percent haircut in sovereign debt

Grenada, which was hit by devastating hurricanes in succession starting in 2004, was devastated not only by Mother Nature but in the bond debt that followed. The island’s government, with close assistance from the U.S. government and religious organizations, successfully negotiated a 50 percent principal reduction in what the nation owes its primarily foreign bond holders.  The country is further negotiating for a “hurricane clause” in its new bond contracts that suspends payments if another natural disaster strikes the island.

After taking a 50 percent haircut on their bond investment, the foreign bondholders will receive a portion of revenues that may be generated by Grenada’s Citizenship by Investment program. The island nation is issuing new bonds in exchange for the U.S. and Eastern Caribbean dollar bonds that were due in 2025 and paid a 7 percent annual interest rate.

Grenada Sovereign Debt 2

Components of the deal discussed as potential soveriegn debt default template

Normally the bond negotiation outcome of a small island nation would not be important, but Eric LeCompte, a U.N. sovereign debt expert and executive director of Jubilee USA whose organization helped negotiate the agreement on behalf of Grenada, says this is part of a template being created for an orderly sovereign debt default process.

LeCompte said it was “welcome” the country was able to negotiate a 50 percent reduction in principle, noting that the haircut was based on a formula being discussed at the U.N. to both provide struggling nations with a way out of their debt without requiring overly burdensome austerity or government cutbacks.

Those losing out were both the foreign bondholders who purchased the debt during better times as well as one “vulture investor” who purchased the government debt for a fraction of its value. The Taiwan Import / Export Bank, following the Argentine template for default, brought the issue into the New York courts, making the exact same arguments as did the bond investors the Argentine case. With Grenada, however, the issue was negotiated out of court under significant behind the scenes pressure, according to LeCompte.

Grenada’s public sector debt, as of 2014, was $907 million, with external debt of $597 million and domestic debt, which was not subject to the same haircut, was $310 million.