The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bank of The Bahamas (BOB) bail-out vehicle believes it can slash the taxpayer's potential liability by "at least 40 percent" through recovering a portion of the toxic loans transferred to it.

The Government's Fiscal Strategy Report, tabled in the House of Assembly yesterday, acknowledged the potential further strain that could be imposed on the Public Treasury when the $167.7m promissory note injected into BOB's balance sheet in exchange for that distressed commercial credit becomes due for payment in August 2022.

This means that the note, effectively a bond on which BOB has been receiving interest payments, matures at that date and has to be replaced with cash from the Government. The interest is supposed to have been paid from the proceeds of loan recoveries by Bahamas Resolve, the special purpose vehicle (SPV) to which the BISX-listed institution's toxic loans were transferred to prevent its collapse.

Tribune Business records show Bahamas Resolve has not always been able to meet these due interest payments, periodically forcing the Government to step in and make them. However, the Fiscal Strategy Report yesterday struck a much more optimistic tone over the SPV's prospects for recovering and realising the proceeds from these distressed loans.

Suggesting that Bahamas Resolve could recover up to $67m of the promissory note sum, the Fiscal Strategy Report said: "The outstanding second promissory note of Bahamas Resolve to the Bank of The Bahamas becomes due in August 2022, and represents a fiscal cost to the Government which has been incorporated in the forecasts.

"Although Resolve has been able to make this semi-annual payment on the promissory note, which is $5.878m quarterly, it estimates being able to meet at least 40 percent of the $167.7m liability through loan recoveries. Therefore, the Government has provisioned in the estimates for 2022-2023 an additional outlay of $100m.

"The Government continues to work with Resolve to establish greater operational transparency through regular financial reporting and publication of asset sales information. The first audited financial statements, covering activities for the years 2014 through 2018, is scheduled to be released in December 2020."

This follow recommendations made by the International Monetary Fund (IMF), which in its 2019 assessment of the Bahamian financial services sector urged the Government to eliminate Bahamas Resolve’s “currently opaque status” and enhance its accountability to the Bahamian people by completing its first audit of the toxic asset-holding SPV in 2019.

Tribune Business previously reported that the bad loans transferred to Bahamas Resolve were worth just 37.6 percent of the $267.7m paid for them, and which subsequently became liabilities for the Bahamian taxpayer.

Noting that the two BOB bail-outs had left Bahamian taxpayers on the hook for a sum equivalent to 2.2 percent of the economy’s total output, the Fund also urged the Government to conduct “a strategic review” of Bank of The Bahamas, develop “a reform plan” and strengthen its governance to prevent a repeat of the “poor lending practices” that almost led to its demise.

“The bank is the only case of significant instability in the banking system the past 15 years,” the IMF’s financial assessment said of Bank of The Bahamas. “BOB’s difficulties began to build as revealed in 2011 when the Central Bank discovered material operational weaknesses.

“A subsequent examination noted an outsized level of lending to politically exposed persons (PEPs), among other deep problems in commercial lending. Negative publicity led to liquidity tightness in late 2012 and early 2013, with large depositors withdrawing their funds.”

Describing Bank of The Bahamas’ bail-out as “two-staged”, the IMF said of the Christie administration’s $100m effort: “After the restructuring, the share of regulatory capital increased to about 47 percent of risk-weighted assets and government control went from 65 percent to 79 percent.

“Justifications for the bailout were the potential for instability, the lack of funding in the DIC to cover insured depositors ($120m in insured deposits with less than $40m in the DIC), and the large government deposits placed at BOB.”

The Fund added: “A second transfer of $176m in gross book value of problem assets (purchasing distressed assets at gross book value is not in line with good international practice) was initiated in August 2017, similar in terms to [the first time]. About this time the promissory notes issued during 2014 were redeemed by the Government."