The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government has “contained for now” the fiscal dangers represented by the $300 million-plus Bank of the Bahamas (BOB) bail-out, Moody’s believes.

The rating agency, in its full Bahamas country analysis, said the risk of the Government having to assume liability for the ‘toxic’ loans transferred from BOB to Bahamas Resolve was “low” for the next three-five years.

Moody’s latest report, released yesterday, warned that the taxpayer could become liable to pay the interest due on BOB’s bonds if Bahamas Resolve is unable to sell or recover the collateral - mostly real estate assets - securing these ‘bad’ loans.

It added that Bahamas Resolve, the special purpose vehicle (SPV) created as a ‘bad bank’ for BOB’s problem loans, was moving to obtain a government-guaranteed loan that will pay out the bonds handed to the bank to fill the ‘hole’ left on its balance sheet. Those bonds start coming due this year.

Moody’s identified the BISX-listed bank, which is 82.6 per cent majority-owned by the Government, as a major credit risk for the Bahamas’ sovereign credit rating along with state-owned enterprises (SOEs).

Its concerns come as K P Turnquest, the deputy prime minister, told Tribune Business that the Government was assessing whether Bahamas Resolve needed a full-time staff to aid what is now an expanded collection effort given that the SPV recently received a further $166 million in ‘toxic’ loans.

“I am looking at that,” he replied, when questioned by this newspaper. “That is a very current and active issue we are giving consideration to. We’ll have to see real soon how we deal with it.

“I know the current arrangement we have has not provided the kind of results we had hoped, and the previous government had hoped, I guess. Having said that, there were some issues affecting their ability to do the job they need to do, and we’ll see - as we do an assessment and take on those additional loans - what the best course of action is - whether we take on a full-time staff, or continue with the current arrangement.”

When Bahamas Resolve was created in October 2014 by the former Christie administration, it was given a government-appointed Board. However, its day-to-day running and operations were passed to the Deloitte & Touche accounting firm.

James Smith, Bahamas Resolve’s former chairman, argued that a full-time staff was not necessary as Deloitte had done “a lot of the heavy lifting”. He conceded that the accounting firm was “high priced”, but suggested less work would be done if the Government tried to cut its fees.

Bahamas Resolve has been able to make the interest payments on the BOB bonds to-date, due to the proceeds from selling properties that secured the initial $45.2 million in net ‘toxic’ loans taken on in the first bail-out.

However, Mr Smith said efforts to obtain more asset realisations had been thwarted by a combination of a sluggish real estate market, difficulties in finding all supporting legal documentation, and the lack of co-operation from some delinquent borrowers.

He warned that the Government may have to step in and take over interest payments to BOB unless Bahamas Resolve enjoyed more success, something that has been picked up by Moody’s.

“While the assets transferred to Resolve have turned out to be worth less than the original $100 million valuation, the SPV has so far been able to generate funds to pay the bulk of interest on the promissory notes held by BOB,” the rating agency said.

“However, because proceeds from the asset sales have been lower than originally envisioned, Resolve is currently in the process of securing a government guaranteed long-term loan in order to retire the promissory notes, which start coming due this year. This also allows Resolve additional time to sell the distressed assets.”

Moody’s confirmed that Bahamian taxpayers, via the Government, have to-date spent more than $300 million on bailing out BOB, thus preventing its collapse. Apart from the $100 million and $166 million promissory note injections, in 2014 and 2017, respectively, the Public Treasury also injected a further $50 million in the past year by taking up its full $40 million rights issue and adding $10 million via a convertible bond.

“To date, the Government has incurred minimal fiscal costs related to BOB,” Moody’s said. “If the transferred assets prove unsellable and/or Resolve is unable to secure other funding to pay BOB, the residual cost could migrate on to the sovereign’s balance sheet.

“However, in the near term (next three to five years) we view the likelihood of contingent liabilities from Resolve crystallising on the Government’s balance sheet as low. Moreover, we note that the Government is today the major shareholder for BOB, holding 58.6 per cent of the bank’s shares; the National Insurance Board owns another 24 per cent.

“Upon the latest transfer to Resolve, the bank should be well positioned to again make profits. Dividends, buybacks or other forms of profit-sharing with shareholders would go into government coffers. These funds would help to offset fiscal costs to the Government were contingent liabilities from the Resolve SPV to materialise.”

The Government is supposed to redeem $107 million of the promissory notes now held by BOB before the June 30, 2018, end of this current fiscal year.

It was supposed to make a $50 million payment on August 30, followed by another $19 million on November 30, 2017. The balance will be paid in further quarterly instalments on February 28, 2018, and May 31, 2018.

The Government is making the redemptions on Bahamas Resolve’s behalf, recognising that the SPV has no possibility of doing this by itself because it has only managed to sell two properties.

Meanwhile, Moody’s also expressed fears that the debts owed by public corporations and agencies could impact the Bahamas’ fiscal position regardless of whether the Government had guaranteed them.

“A potential rising risk to the Government’s fiscal strength is the increase in the debt burden of state-owned enterprises (SOEs), which reached 17.5 per cent of GDP as of March 2017,” Moody’s warned.

“Although less than half of it is fully guaranteed by the central government, should these contingent liabilities materialise it would have an important negative effect on the Government’s balance sheet.

“Potential reforms to SOEs would be key to ensure that their finances improve, both to reduce the necessity of sovereign support and to decrease the current transfers the central government makes every year that impact its own fiscal deficit.”

The total debt owned by state-owned enterprises (SOEs) has nearly doubled in a decade, having risen from a sum equivalent to 9.2 per cent of GDP in 2007-2008.