The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government is assessing a “win-win solution” that would relieve both itself and successful bidder(s) from the burden of the Bahamas Electricity Corporation’s (BEC) $450 million legacy debt, Tribune Business can reveal.

The Christie administration, according to well-placed sources, is examining whether to take care of BEC’s existing liabilities itself by shifting them off the Corporation’s balance sheet and into a special purpose entity or vehicle (SPV).

This SPV would then refinance the $450 million via a debt issue to private investors known as ‘rate reduction bonds’ - instruments that have been used by energy companies throughout the world to raise capital and replace existing debt.

These bonds, which would have a principal maturity around 25 years later, would see interest payments to investors serviced from a portion of the revenues generated by BEC customer payments. Investors’ capital would be secured through the SPV having a ‘first charge’ or lien over BEC’s tariff.

Tribune Business was told that, from the Government’s perspective, the main benefits of this proposal are that no government guarantee is needed for the bond issue.

And, by shifting the $450 million into the SPV, BEC’s existing government guaranteed debt will be removed from the Christie administration’s balance sheet, thereby reducing the Bahamian national debt at the perfect time.

From the BEC bidders’ perspective, this solution would lift the considerable burden of refinancing the legacy debt from their shoulders.

The initial Request for Proposal (RFP) on the BEC restructuring had asked both generation and transmission/distribution bidders to take on this task, and propose how they would do it.

But the Government and its advisers believe this tweak to the RFP proposal will benefit all concerned by freeing up the preferred bidder(s) to focus on BEC’s ongoing operations and capital improvements.

“It’s a way to scoop up all the liabilities, restructuring costs and ring fence them at a very low rate because of the first charge on the tariff,” one source said of the latest SPV proposal thinking.

“You can then move on to a new world with a clean slate.”

Apart from BEC’s existing bank and bond debt, which totals around $350 million, Tribune Business was told that the Government is exploring whether to include other liabilities - environmental clean-up costs, unfunded pension liabilities and restructuring (workforce reduction costs) in the $450 million refinancing. Working capital may also be involved.

Tribune Business understands that the Government and its advisers have already received favourable responses to the SPV proposal, and indications that it could be done at a low interest rate and without a guarantee. Any issue would also be rated for creditworthiness.

BEC’s crippled financial state means the SPV scheme is necessary, for if the Corporation tried to refinance itself, a higher interest rate and government guarantee would be essential for success.

The financial benefits for the Government were highlighted in an Oxford Economics report produced for one of the five BEC bidders, the Caribbean Power Partners/Bahamas Generation and Utilities Corporation group, and the Bahamas Chamber of Commerce and Employers Confederation (BCCEC).

“The current Bahamas Generation and Utilities Corporation proposal includes relief of a significant amount of debt currently served by the government of the Bahamas and/or BEC,” the report said.

“Under the proposed project, the Government would be relieved of roughly $450 million of existing debt, about 10 per cent of the current national debt. While benefits associated with this reduction of debt were not analysed in this report, they could be substantial in the context of broader fiscal reform.”

The Oxford Economics study added: “A reduction of 10 per cent of the national debt, along with other meaningful and credible changes, could lower borrowing costs faced directly by the Government, and indirectly, borrowing costs in the private sector as well.

“Lower interest rates would make credit more accessible and could spur private sector projects that otherwise would not go ahead but for the lower interest rates.

“The Government would also need to service a lower level of debt, and as a result could then spend on other priorities or pass on savings to Bahamians through lower taxes. These benefits could correspond to additional spending in the Bahamian economy and stronger growth in output, income, and employment.”

Meanwhile, Tribune Business understands that the Government is also mulling whether to alter other aspects of BEC’s restructuring, plus push forward faster on other energy sector reforms.

While the initial tender contemplated granting an equity stake to the preferred generation bidder immediately, this newspaper understands the Government’s current thinking is leaning more towards a management contract in the initial stages.

This would give it the opportunity to assess the winning bidder in action, and discussions on an equity stake would commence once the time comes for multi-million dollar investments in new generation assets (electricity plants) and other key equipment and improvements. A management contract had always been contemplated for BEC’s transmission and distribution business, with the Government retaining 100 per cent ownership there.

Tribune Business understands that the next steps in the BEC reforms, which the Government is expected to decide upon imminently, involve whittling down the five remaining bidders. Whether the field will be reduced to the preferred bidder(s) is unclear.

And, elsewhere, Tribune Business understands that the Government and its advisers are seeking to “accelerate” the roll-out of renewable energy and soon publish a completed National Energy Policy.