The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

THE Government last night said the outcome of its $750m bond issue was “as favourable as we could have expected”, with the placement more than three times oversubscribed.

Marlon Johnson, the Ministry of Finance’s financial secretary, told Tribune Business that “investor indications” of more than $2.8 billion had helped to drive down the interest coupon (debt servicing costs) to 6 per cent.

He added that the issue would replace short-term facilities taken out to meet the Governent’s $722m borrowing requirement for the current and 2016-17 fiscal years, plus “revised debt payment/refinancing obligations” worth $600.2m.

The $750m foreign currency bond thus covers more than half of a $1.323 billion “new borrowing envelope” that the Minnis administration is putting together, with the Ministry of Finance emphasising that it is replacing existing loan facilities rather than adding to the $7.2 billion-plus national debt.

Mr Johnson said last night “the remaining proportion” of the $1.323 billion envelope (roughly $583m) will be financed by the Bahamian capital markets, suggesting that concerns over local capacity - with commercial banks and other institutions thought to be near their regulatory limits in terms of government bond holdings - had prompted the Government to seek foreign currency funding.

Confirming the successful placement of the ten-year bond, which was exclusively revealed by Tribune Business on Monday, the Government said in a statement last night: “The order book closed with indications in excess of $2.8 billion, and with over 200 accounts participating - including many new investors in Bahamas’ debt.

“This strong order enabled financing at a lower interest rate than the price range initially indicated at the announcement of the transaction.”

Mr Johnson subsequently told Tribune Business that the $750m capital raise was intended to “optimist” the Government’s debt holdings, and improve cash flow, through replacing short-term bank loans and Treasury Bills with longer term paper.

“One of the encouraging signs was that the rate was driven down to 6 per cent given the strong, high demand,” he said. “Getting $2.8 billion in investor indications had positive pressure on the rate, and put us in as favourable a position as we could expect given where we are and where the market is.”

That refers to The Bahamas’ “junk” status with Standard & Poor’s (S&P), with this nation’s reduced creditworthiness (having barely avoided similar action by Moody’s) forcing it to pay a higher price for its debt.

The Government will likely interpret the successful placement, and lower than expected interest rate (debt servicing costs) as a sign of international investor confidence in its economic growth and fiscal consolidation strategies despite the fact these have yet to be fully implemented.

However, some observers are likely to be concerned by the Government’s use of $300m, from the $750m raised, to replace Bahamian dollar-denominated bank loans and Treasury Bills.

Their replacement by US dollar financing will thus increase the Bahamas’ foreign currency debt as a proportion of the total, something that James Smith, a former finance minister, said in Tuesday’s paper should be kept “as low as possible”.

Mr Smith also expressed concern that increased foreign borrowings would raise the Government’s risk levels, and that it should have sought to “mop up” the excess $1.7 billion liquidity in the commercial banking system first before heading to the international markets.

However, Mr Johnson said the Government’s decision was based on the consultation and advice of the Central Bank of The Bahamas on how to “make optimal use of market conditions”.

He added that “given the limitations on [government] paper the commercial banks can hold, and what the market can bear,” the Minnis administration decided to go international for the majority of its $1.323 billion “envelope”.

“We haven’t obviated, and will be coming back to the local market for further placements even within this fiscal year,” Mr Johnson told Tribune Business.

“The Government took out short-term facilities with the anticipation of replacing them with long-term debt. I think, for us, it also helps us to manage our cash flow requirements by wrapping it [the debt] into one.

“We want to make sure we have the right currency mix, in terms of local and international, and long-term management of our cash flow. This issue allows us to optimise our obligations and cash flow.”

The $450m “balance” from the bond will be used to “refinance and term out” several US dollar bank loans. “These facilities were incurred as part of the Government’s approved financing programme for 2017-18 ($322.5m to cover the deficit, plus revised debt repayment/refinancing obligations of $600.2m) and the residual funding for arrears from fiscal year 2016-17 ($400m),” the Government’s statement said.

While this totalled $1,323 billion, it added that the facility “will not result in an increase in the debt level of the country, nor will it represent an increase over the approved financing programme for the current fiscal year.

“Instead, the transaction refinances existing debt stock in a manner that optimises the debt portfolio of the country.” The Government believes the average debt maturity extension resulting from the $750m issue will enable it to better meet its obligations, and increase the proportion with a fixed - as opposed to variable - interest rate.

The Minnis administration also announced it will create a “sinking fund” into which monies will be placed to meet the debt repayments arising from the $750m issue.

The 6 per cent interest rate is some 362.1 basis points above yields on the US Treasury’s ten-year bond benchmark, with interest to be paid semi-annually. Principal repayments will take place over three years, beginning on November 21, 2026, and finishing on the same date in 2028.

The transaction, which took place following an investor roadshow that included London, Boston, New York and Los Angeles, will settle this coming Monday. Deutsche Bank Securities and RBC Capital Markets managed the issue.