The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Public Hospitals Authority (PHA) is seeking to ultimately raise $100 million from investors via a series of bond issues, despite its financials showing it is ‘technically insolvent’ without the Government’s annual subsidy.

Documents obtained by Tribune Business show that the PHA’s $45 million private placement, which launched this week, is just the first phase of refinancing plans intended to repay a $55 million Royal Bank of Canada loan plus provide the Princess Margaret Hospital (PMH) operator with more working capital.

Some $65 million of the $100 million will be used to repay Royal Bank, which provided the debt financing for the Critical Care Unit construction, leaving roughly $35 million - almost one-third - of ultimate bond proceeds free for other purposes.

The private placement memorandum for the first tranche of PHA bonds reveals: “By way of a resolution of the Board, the Authority has decided to raise up to $100 million to finance the repayment of an existing $55 million construction loan held with Royal Bank of Canada, and an existing loan facility of $10 million with the National Insurance Board of the Bahamas and provide for additional capital works.”

This week’s $45 million offering, which will close next Friday, November 15, will generate $30 million to go towards repaying the Royal Bank loan, with the remaining $10 million dealing with an existing debt owed to NIB. The remaining $5 million will be used to finance the PHA’s “general operations” and the offering costs.

“The balance of up to $100 million will be raised through subsequent note offerings,” the private placement memorandum said.

Referring to the existing issue, it added: “The Series A Notes will pay interest semi-annually in March and September. The Series A Notes will be amortised in 19 equal annual instalments, commencing on September 30, 2015, and terminating on September 30, 2033.”

Given the high demand for fixed income investments in the Bahamian capital markets, the low supply of such options, and the more than $1 billion in excess liquidity (surplus assets) in the Bahamian commercial banking system, there is little risk that the PHA issue will not be oversubscribed.

The bonds are targeted at institutional investors and high net worth individuals, plus key broker/dealers, and as such members of the Bahamian public should not seek to subscribe because it is a private offering.

However, one source, who has seen the PHA documents, noted that investors were being asked to inject capital into bonds issued by an entity that was “technically insolvent”.

And they added that the language in the Government’s so-called ‘Letter of Support’, which is being used to effectively ‘guarantee’ PHA investors will be repaid, “is extremely weak”.

The last audited financial statements for the PHA, produced by the Grant Thornton accounting firm for the year to end-June 2012, are ‘qualified’ due to its ‘current’ solvency deficiency.

“We draw attention to Note 22 in the financial statements, which indicates that the Authority’s current liabilities exceeded its current assets by $18.628 million,” Grant Thornton said.

While this was down from the $26.405 million that existed at end-June 2011, the accountants noted that the PHA’s accumulated deficit stood at $73.042 million on June 30, 2012.

Grant Thornton added: “These conditions, along with other matters as set forth in Note 21, indicate the existence of a material uncertainty, which may cast significant doubt about the Authority’s ability to continue as a going concern without the continued financial support of the Government of the Commonwealth of the Bahamas.”

Data contained in the private placement memorandum shows the Government injected subsidies of $183.439 million and $207.136 million into the PHA in 2011 and 2012, respectively.

While it still suffered a $10.195 million comprehensive loss in 2011, the PHA was able to turn a small $2.888 million profit the following year, albeit with a massive government subsidy.

“For the 2013/-2014 fiscal the Government has allocated $199.745 million for recurrent expenditures,” the offering document said of the PHA’s current subsidy support.

To reassure investors in the $45 million bond issue, the private placement memorandum said a portion of the Government’s subsidy would be paid into an escrow account, with the funds used specifically for debt servicing.

Touting the benefits of investing in the first tranche of PHA bonds, the offering document, produced by RoyalFidelity Merchant Bank & Trust, said the 6 per cent interest coupon (yield) would likely be seen as attractive.

Yet it warned: “The Authority is dependent on annual financial support from the Government of the Bahamas to cover the majority of its operational costs.

“The Authority continues to operate at a deficit, and financial support from the Government is essential for the continued operations of the Authority. While such funding from the Government is expected to continue, the level of funding is not guaranteed.”

The private placement memorandum also revealed that the PHA does not plan to list the bond issue on the Bahamas International Securities Exchange (BISX).

This makes it more difficult for investors to exit the PHA bonds should they desire, given that there is no formal market mechanism to facilitate their trading. The offering document points out that the bonds are not for those seeking liquidity.