The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas has received “a huge vote of confidence” after the Government’s $300 million foreign currency bond issue was 20 times’ oversubscribed, with investors accepting an interest rate almost one percentage point lower than anticipated.

James Smith, the former minister who is now a key Ministry of Finance adviser, yesterday confirmed to Tribune Business that the $300 million sovereign issue had received “a fairly robust response” from the international capital markets.

“I think they were closing the offering some time yesterday [Monday] afternoon,” Mr Smith said, revealing that it had attracted subscriptions worth $5-$6 billion - more than 20 times’ the amount sought.

And he also confirmed that the 10-year bonds, set to mature in 2024, had been placed with an interest coupon of just 5.75 per cent - almost a full percentage point lower the initially projected 6.5 per cent.

“Originally they were expecting much higher [interest rates],” Mr Smith added, “and the guys placing it kept pushing the rate down because of the huge demand. They were able to get almost 100 basis points less than anticipated.”

The reduced interest compensation for investors will be especially welcomed by the Christie administration, which has been seeking to minimise its debt servicing costs as much as possible.

And Mr Smith said the 100 per cent subscription, coupled with the lower-than-expected interest costs and surplus demand, represented a major boost for the Bahamas and its economy.

Noting that the bond issue’s interest rate was similar to what Bahamas-based investors would have demanded, the CFAL chairman added: “I think it’s huge statement of confidence by the international community on one hand, but also indicates there’s a huge amount of liquidity in the global marketplace.

“It says a lot for the confidence that the international community has in the Bahamas’ ability to pay its debt. We’ve never, ever defaulted on or rescheduled our debt since becoming part of the international community.

“Up to now we’ve been fairly good, and the idea [of fiscal reform] is to keep that record by staying out of the clutches of the IMF and maintain fairly sound macroeconomic policies.”

Mr Smith said that since the Bahamas achieved independence in 1973, regional competitors such as Barbados and Jamaica had both been forced to seek the IMF’s tender embrace, as had the likes of the UK.

Some global investment analysts, though, were less than enthused. Carl Ross, of Oppenheimer & Co, described the Bahamas as a “deteriorating credit story” with further downgrades to its sovereign credit rating likely.

“Bahamas is a deteriorating credit story that is almost becoming a ‘frequent’ issuer of yieldy and illiquid bonds in small issue sizes. Where should these new 5.75 per cent of 2024 settle in,” Mr Ross wrote, in a note obtained by Tribune Business.

“Both rating agencies have negative outlooks. I think there is a high likelihood that downgrades happen, but the credit will almost surely remain in ‘BBB’ space.

“Weak tourism, weak growth, rising crime and weak fiscal accounts are weighing on the credit. The Government is implementing a VAT this year to try to appease rating agencies,” he added.

“One concern I have is the commitment to fiscal reform. Now that Bahamas has received $5-6 billion in demand for its paper at the initial price talk of 6.5 per cent, will this reduce the authorities’ resolve to do real fiscal adjustment? The rating agencies will be watching this.”

And the Oppenheimer & Company analyst: “How much should one be paid for an off-benchmark, illiquid credit that is slowly losing its traditional insurance company sponsorship due to its declining credit ratings?”

Comparing the Bahamas to recent sovereign issues by the Cayman Islands and Bermuda, plus various Latin American nations, Mr Ross suggested that this nation’s $300 million issue should trade within an interest yield spread of 5.5-6 per cent. Buyers for the debt, he added, would “emerge” at the latter rate.

“Further upside.... would require a reversal of the negative credit trends, which could be possible in 2015 if the VAT is successfully implemented and some key major tourism projects come on stream and attract visitors,” the Oppenheimer & Co executive said.

Still, Mr Smith told Tribune Business that the Bahamas’ successful placement stood in stark contrast to Barbados’s unsuccessful capital raising just weeks before, with investors now said to be demanding 10 per cent interest from its Caribbean rival.

“The Bahamas’ macroeconomic figures are still very good,” the former finance minister said. “They’re approaching these horrible benchmarks, but at this point they’re not there.

“When you compare them with the rest of the world, not just this region, European debt ratios are at 80 per cent, not that we should be taking any comfort from that.”

Mr Smith said the bond issue showed “the real influence” of Moody’s and Standard & Poor’s, and that they could not be “dismissed”.

“If you want to continue to raise money at reasonable rates without straining your Treasury, you’ve got to follow sound economic policies that are acceptable to the people assessing your economy,” he said.

Simon Wilson, the Ministry of Finance’s deputy financial secretary, declined to comment last night on the bond issue, directing Tribune Business to instead speak with the issue’s placement agents/underwriters - J P Morgan and RBC Capital Markets.

The $300 million proceeds, some of which Mr Smith said may be earmarked to pay down existing government debt, will also boost the Bahamas’ foreign currency reserves and banking system liquidity.

Standard & Poor’s (S&P), though, last month queried the Government’s decision to tap the international capital markets with the $300 million bond, suggesting it could easily raise this sum locally.

It pegged the Bahamas’ foreign currency debt, as a percentage of total debt, at around 24 per cent at year-end 2012, and noted that increased foreign currency borrowing would take a greater amount of external reserves to service it.