The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government must ensure it has “the expertise to manage the legal and financial risk” arising from its “innovative” $206.5m repurchase deal with Goldman Sachs, a prominent banker says.

Gowon Bowe, Fidelity Bank (Bahamas) chief executive, told Tribune Business the transaction was “creative” and employed methods/techniques not often used in this nation to raise financing for the Government by monetising assets it owns.

However, while suggesting that The Bahamas was “probably 20 years’ behind the times” in employing such financings, he added that the Goldman Sachs deal created yet another obligation the Government must repay since it has committed to reacquiring these assets when the transaction matures in two years’ time.

“What it demonstrates is that they’re looking at more creative ways of monetising some of the assets they have,” Mr Bowe told this newspaper. “It’s creative and not often used in The Bahamas...

“It has not changed the overall balance sheet, but has increased the debt obligation by monetising assets the Government owns. What I want to be clearly articulated is that the Government is creating the in-house expertise to manage the legal risk, because it is a legal risk, and secondly, the financial risk, because ultimately this contract has created the obligation to buy the securities back.”

Mr Bowe spoke before Free National Movement (FNM) leader, Michael Pintard, issued a statement last week challenging why the Government needed to pledge almost $236m worth of assets - which were intended to repay future bond issues when they mature - as collateral to obtain a smaller cash sum.

“It is distressing to learn that the Government has had to enter into a transaction that heavily discounts these assets that belong to the Bahamian people and encumbers them as part of the deal,” Mr Pintard argued.

“Previous administrations have been able to secure short-term and long-term loans and financing without having to put up collateral. Do the creditors not have the confidence in the Davis administration to provide this relatively short-term two year financing with just the customary sovereign guarantee? Why the need for collateral? What does this say about the credibility of this government and its fiscal plans?”

However, Michael Halkitis, minister of economic affairs, immediately hit back by asserting: “There’s nothing sinister going on here.” Arguing that the Government had been “totally transparent” over the Goldman Sachs transaction, he said it was having no issues meeting its borrowing or debt financing needs.

“The very first point I want to make is the Government of The Bahamas is having absolutely no difficulty in raising money,” Mr Halkitis told the weekly media briefing by the Prime Minister’s Office. “Unfortunately, this is a narrative being pushed by the Opposition and opposition forces, but there’s absolutely no truth to that.”

He added that the Goldman Sachs repurchase was part of the Government’s efforts to lower its borrowing costs (interest payments), and spread out when its debt issues mature and become due for repayment, so as to ease the burden on Bahamian taxpayers.

Refuting the Opposition’s implication that the repurchase move, commonly known as a “repo”, was a “convoluted, exotic” deal, the minister said thousands of such transactions are conducted every day in the global financial markets.

“The repo transaction allows the Government to leverage the assets in the ‘sinking funds’, while continuing to receive income on those assets and to grow and invest in the sinking funds,” Mr Halkitis said. “No payments will become due from the sinking funds during the term of the repo, so there is no question of assets not being available for debt repayment.

“In addition, and this is very important, the rate of interest on the repo is 2.4 percent. You will recall that the bond issue done by the former administration, the rate was 8.95 percent. We went out for $600m at 8.95 percent, and went out for an additional $225m at 8.95 percent.”

Mr Halkitis repeated the two interest rates, 2.4 percent on the Goldman Sachs “repo” and 8.95 percent on the Minnis administration’s last international bond, to drive home the point that the Davis administration got far better value for Bahamian taxpayers via lower debt servicing costs.

“We are managing our profile to reduce the cost of the debt. We’ll be using a number of different instruments to do that,” he added. However, Tribune Business research shows that the second $225m tranche referred to by Mr Halkitis was, according to Ministry of Finance statements issued at the time, carried an 8 percent interest coupon rather than 8.95 percent.

And the comparison with the Minnis administration’s bond issue is not a direct like-for-like, as the $895m involved no collateral and was placed at the height of the COVID-19 pandemic when global capital markets were in turmoil. The bond was issued then because The Bahamas needed to replace lost tourism foreign currency inflows and support the one:one exchange rate peg.

Collateral, in the form of the ‘sinking fund’ assets, will have been required to obtain the relatively low interest rate from Goldman Sachs. Simon Wilson, the Ministry of Finance’s financial secretary, described it to Tribune Business as the “cheapest form of financing” available to the Government at this time.

In effect, the Davis administration has monetised the Government’s ‘sinking fund’ assets to secure what it believes is the lowest-cost deal for Bahamian taxpayers at this time. It has done so without giving up ownership of the assets given the obligation to buy them back in 24 months time, and it will still receive interest on these securities, which are mainly US Treasury bills and bonds.

However, the “repo” is still a form of collateralised borrowing and has created an additional obligation for the Government. The transaction provides the Davis administration with short-term breathing room, and the foreign currency liquidity/cash necessary, to meet its short term operational expenses. It is bridge financing to fill the gap until bond market conditions become more favourable.

Capital market sources, speaking on condition of anonymity, told Tribune Business that the Government had been exploring whether to do a similar Bahamian dollar-denominated “repo” in the local capital markets but ultimately went with Goldman Sachs because it offered the cheapest deal and lowest interest rate.

Suggesting that the “repo” may just be the start of a broader relationship between the Government and Goldman Sachs, one contact said: “They were talking about the BPL [rate reduction bond] issue. They were talking about deferring going to market until this year. Goldman said: ‘Don’t rush it’.”

However, one non-political source, speaking on condition of anonymity, yesterday said questions about the Goldman Sachs transaction remain. Calling on the Government to disclose the upfront fees paid to the multinational investment bank for the “repo”, they suggested that the 2.4 percent rate was high compared to that normally charged on such deals.

They also queried the two-year duration, asserting that most “repos” lasted for durations no longer than two to three months, with many concluded in days or weeks. However, the 2.4 percent rate likely reflects the longer two-years on the Government’s deal and therefore the increased risk.

A 2.4 percent interest rate on $206.5m equates to $4.956m, meaning that Goldman Sachs stands to earn almost $5m per year or close to $10m over two if the “repo” lasts for two years. Still, the need for the transaction was further exposed by the price and yields at which existing Government foreign currency bond issues are trading at on international markets.

Trading information from the Frankfurt stock exchange indicates that the 8.95 percent bond referred to by Mr Halkitis was trading at almost a 15 percent discount to its face value at the end of last week, with a yield of 11.647 percent. And the $650m bond placed immediately before that is trading at a 16 percent discount and yield of 10.32 percent.

This indicates that The Bahamas would have to pay double-digit interest rates to place any foreign currency bond issues in the current environment, which would further increase the burden on local taxpayers. Several contacts have criticised the former administration for electing to proceed at 8.95 percent, suggesting it has set the interest bar too high for future bond raises.

The Davis administration placed the $700m bond issue left by its predecessor on the backburner when it took office. Mr Halkitis denied the Opposition’s accusations that it was being “inconsistent and contradictory” with its fiscal messages, saying the Government was merely doing all the preparatory work to ensure it is “ready to go” when the time comes to tap the international capital markets.