The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government’s new Treasury Note security will ultimately reduce its debt financing costs, its financial adviser said yesterday, conceding it was “difficult to tell” whether the first $150 million issue will be fully subscribed.

Michael Anderson, RoyalFidelity Merchant Bank & Trust’s president, expressed optimism that next week’s Treasury Note launch would be fully taken up given the “very strong level of interest” expressed to-date by Bahamian commercial banks.

Those institutions are collectively sitting on more than $1 billion in surplus liquidity that is seeking an investment return home, but Mr Anderson said a medium to long-term goal behind the Treasury Notes’ creation was to broaden the Government;s funding sources beyond the banks.

He explained that the Government traditionally accessed the Bahamian domestic debt market “in a very limited sense”, with the banks, the National Insurance Board (NIB) and the Central Bank of the Bahamas typically picking up the majority of Government Registered Stock and Treasury Bill issues.

While broker/dealers had enabled more non-bank institutional investors to access the Government debt market in recent years, Mr Anderson said participation had been limited to very few.

“It was still a relatively small component of the market,” he told Tribune Business, explaining that the Treasury Notes, together with the longer-term Bahamas Government Stock (BGS) security unveiled last year, heralded the introduction of more market-driven mechanisms to satisfy investor and government objectives.

“It is this kind of recognition that there’s this need for the market, and investors in general, to have alternative investment opportunities,” Mr Anderson told Tribune Business.

“The Government needs alternative sources of funding, and investors need alternative sources of investment. This [Treasury Notes] kind of meets these two objectives.

“I think the introduction of BGS, and these short-term securities, will help investors find good, solid, low-risk investments that give them reasonable returns and get them outside the limits of the banks.”

Next week’s two-day $150 million Treasury Note issue will launch on Wednesday, and is part of an initiative where the Government is seeking to raise a total $250 million from this short-term security during the 2015-2016 fiscal year.

The $150 million issue, which is seeking to raise 60 per cent of the yearly total, will be evenly split between 30-day, 90-day and 180-day Treasury notes - each tranche offering $50 million.

The 30-day (one month) bonds will carry a 1.75 per cent interest coupon; the 90-day (three month) variety a 2 per cent interest rate; and the 180-day (six-month) bonds a 2.5 per cent interest rate.

Mr Anderson suggested that the Treasury Notes might be especially attractive to the banks because prudential and regulatory norms limited the amount of longer term government bonds they could carry on their balance sheets.

The RoyalFidelity chief added that the new security would also help lower the Government’s short-term borrowing costs by “standardising the loan arrangements they have across the market”.

He explained that rather than borrow from different commercial banks at different interest rates, the Government could now do this via Treasury Notes that all carried the same, standard interest coupon.

And that coupon would likely be lower than the interest rates offered by Bahamas-based commercial banks individually.

“The Treasury Notes create a standardised platform where there are the same rates at the same maturities,” Mr Anderson told Tribune Business.

“The Government’s bank rates are in excess of the rates being proposed for the new Treasury Notes, so it should drive down their cost of funding by making it available to a broader investor group.

“This is a step in the right direction, people getting outside bank deposits, and getting the Government outside the banks in terms of raising money.”

Mr Anderson conceded that the Treasury Notes were almost 100 basis points higher than the Treasury Bills previously employed by the Government to raise short-term funding, as these typically enjoyed 0.6 per cent interest coupons.

However, this was more than cancelled out by the savings on bank borrowings, and he said: “Overall, when you look at the amount of money expected to be raised, over time it will reduce the cost of funding to the Government, while creating a more reliable source of funding.”

Mr Anderson emphasised that the investor pool participating in Treasury Note issues would likely increase over time, as persons became more familiar with the new security.

“It’ll be interesting to see how many people come into this first one,” he told Tribune Business, “but we’ve had a very strong level of interest expressed by the banks. I think they’ll be the major participant.

“Whether we get the $150 million fully subscribed, I don’t know. I expect so, but it’s difficult to tell with the first offering.”

Investors will be able to participate in the Treasury Note programme by opening an account with a broker/dealer, if they have not done so already.