The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government’s decision to place $200 million worth of debt through local broker/dealers was yesterday described as an “extraordinarily large step” in modernising the Bahamian capital markets.

Michael Anderson, RoyalFidelity Merchant Bank & Trust’s president, told Tribune Business that the move, more than a decade in the making, would finally see Bahamian government debt auctioned and priced via market mechanisms.

The $200 million in government bonds, which will be sold to investors between now and June 2015, is being divided into four tranches.

The first $75 million will be formally launched to the Bahamian market on December 11, with a further $50 million to follow in January and the final two - divided into $37.5 million each - placed by June 2015.

RoyalFidelity is the lead arranger for the current $75 million tranche, with Mr Anderson yesterday revealing to this newspaper that the investment bank had already received “initial offers for $60 million or 77 per cent of it.

Each debt issue itself is divided into four slices, with their own interest rates and maturities, in a bid to satisfy the needs and risk appetites of different investors.

The first $75 million issue, which will close on December 14, is comprised of $22.5 million in three-year bonds carrying a 4 per cent coupon; $22.5 million with a four-year maturity and a 4.25 per cent interest rate; $22.5 million with a 4.5 per cent rate and seven-year maturity; and $7.5 million with a 6.25 per cent coupon and 30-year maturity.

Mr Anderson confirmed information reaching Tribune Business that the $7.5 million, 30-year chunk was already fully subscribed.

He explained that this was needed to meet the needs of Bahamian life insurers, who have been demanding more long-term government paper to help them match this asset to liabilities of a similar duration.

Mr Anderson told Tribune Business that the Government, aided by Bahamas-based broker/dealers, was finally moving forward to execute on capital market development plans first laid out in 2004.

That had recommended issuing government debt through Bahamian broker/dealers rather than through the Central Bank of the Bahamas, with the bond subsequently listed and traded on the Bahamas International Securities Exchange (BISX). The Bahamas Central Securities Depository (BCSD) will also replace the Central Bank as the custodian for who holds the debt.

All these developments will occur with the imminent $75 million debt issue. Mr Anderson said the goal was also to “broaden distribution” of government debt securities to individual Bahamian retail investors, plus establish a “yield curve” on BISX that could be used to price corporate bond and preference share issues.

“It’s a major step, whether it’s from a yield curve perspective or the broadening of the base by getting individual investors involved in it,” he told Tribune Business.

“It’s quite a major step for the country, and by taking the issuing and registration process from the Central Bank out into the market, it will give the process a lot more flexibility than it traditionally has had.

“It’s the first time in a very long time that a new government offering has come into the market. It’s the first step where the Government hopes to issue debt on an auction basis rather than set the rate.”

Previously, all government paper debt securities have been issued through the Central Bank, with the buyers typically large institutions such as banks, insurance companies and pension funds.

Interest coupons were always fixed prior to the sale, but Mr Anderson said the new structure will rely on market mechanisms for pricing, with investors now “bidding” at a certain rate to get their intended allocation.

And, with the Securities Depository replacing the Central Bank as custodian, and the debt being actively traded on BISX, Mr Anderson said the $75 million issue would effectively be “decertified”.

The securities will now be known as Bahamas Government Stock, not Bahamas Government Registered Stock (BGRS), as investors will no longer need certificates of registration to prove their ownership. This function will now be performed electronically by BISX and the Securities Depository.

Mr Anderson said the $200 million in upcoming debt issues would give small Bahamian retail investors more options in an environment where they were getting little return from bank deposits.

He added that the securities would offer “attractive interest rates” with “a good level of security behind them”.

And, with the Government’s paper set to be listed on BISX at a fixed rate, Mr Anderson said there was an opportunity to create a debt market yield curve, where future public and private sector issues - bonds, preference shares - could be benchmarked and priced accordingly.

The RoyalFidelity chief said he was “looking for more people to step up and subscribe” to the imminent $75 million issue, adding: “This is the first of four tranches expected to be issued before June next year.

“The balance of the next three issues will be $125 million, so $200 million is expected to be raised before June next year.

“It’s an extraordinarily large step for the Government and the capital markets in terms of being able to significantly broaden participation, and we see it as a step towards normalising the issuance of government debt in the same way it gets dealt with in more sophisticated and developed markets.”

Apart from RoyalFidelity, all other BISX member broker/dealers - CFAL, FG Capital Markets, Colonial Pension Services, Leno Corporate Services and Societe Generale Private Banking (Bahamas) - are acting as placement agents.

They will be charging a 0.25 per cent fee to investors.