The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Bahamian financial analysts yesterday said trading volumes will be “the critical factor” when $3.6bn in government bonds begin trading on the stock exchange today.

Larry Gibson, vice-president of Colonial Pension Services (Bahamas), told Tribune Business that investors must now understand that Bahamian Registered Stock (BRS) issues they buy into will not necessarily maintain the prices at which they were issued.

Medium and long-term government bonds have traditionally retained their issue price in the over-the-counter market that was overseen by the Central Bank, but the start of trading in 220 of these securities on the Bahamas International Securities Exchange (BISX) means a potential shift to market-driven pricing.

Michael Anderson, RoyalFidelity Merchant Bank & Trust’s president, hailed the trading start as “a long time coming” given that BISX had been seeking to secure the Government’s debt market ever since its founding some 21 years ago. The failure to land it from the outset was a key factor in plunging the exchange into an early financial crisis.

With that episode long behind BISX, Mr Anderson said the trading start would enable investors to better determine which government debt securities were available, and at what price, in a much more transparent market.

Besides providing more access and openness, plus more liquidity, the RoyalFidelity chief voiced optimism that it will also help create “a yield curve” that allows the Bahamian capital markets to better assess risk and price future corporate bond issues accordingly by using the Government’s debt securities as a “base:.

“I’m hoping it also prices securities more at market levels,” Mr Anderson told Tribune Business. “Historically they’ve [government debt issues] traded at par, trading at the price at which they were issued regardless of interest rate and tenor (maturity).

“I think we will start to get a more market driven rate, which we have been waiting for for years...... For the first time ever in The Bahamas there will be a standard yield curve that everyone can price against, so you will get more price efficiency.”

However, Mr Anderson said the amount of trading required in a government security to change its price could be “a major issue”. BISX’s equities market has long suffered from a lack of liquidity, given the relatively small number of buyers and sellers, and the RoyalFidelity chief cautioned that the same thing may happen with government debt given the tendency of local investors to buy and hold rather than trade.

He said his “understanding” was that a minimum $100,000 worth of trading was required to change the price of a government bond, and suggested this be reduced to $10,000 to allow for greater liquidity and price discovery in the Bahamian market.

“The market may not be able to change the price depending on the amount of volume that is required to do this,” Mr Anderson explained to Tribune Business. “If the price is too high, people won’t trade.

“I think this is a huge positive for BISX and the market, but there’s a couple of issues where the market has to work with BISX and the Central Bank to finalise more efficient pricing. I think there will be certain key issues that need to get sorted out over the the next three to six months as people get used to trading.”

Mr Gibson, meanwhile, said one impact from the BISX listing and trading is that market forces - rather than the Government through the Central Bank - will now control the price of its listed debt securities as all works as it should.

“The critical factor is whether we get volumes where there’s active trading in the various sectors and market,” he told Tribune Business. “A lot of people are not cognisant of the fact government debt securities will now not always trade at par.

“People need to become accustomed to that, and the pricing of bonds generally reflects the level of interest rates at any given point in our economy. That’s the biggest thing people in The Bahamas have to become aware of. You don’t just buy them and they stay at par [issuance value] for 30 years.”

The 220 government bond issues set to list on BISX today have maturities ranging from one to 30 years. K Peter Turnquest, deputy prime minister, said in a statement: “This is another milestone in the evolution of the Bahamian capital markets, and delivers on a key component of our overall initiative to strengthen the public debt management framework and promote the development of the Government bond market.

“In the long term, it will facilitate the issuance of these securities and help to reduce the Government’s overall funding costs. Investors will also benefit from the greater ease of purchasing and transacting these instruments. We are proud to be one of the first Caribbean nations to trade our public debt via our national stock exchange.”

John Roll, the Central Bank’s governor, added: “Trading of fixed-rate government securities creates important benchmarks for investors and other issuers that can then be used in evaluating the rates of other issuers. As a part of this project, the Central Bank also became a BISX broker/dealer member in order to play a role in this regulated market.”

Keith Davies, BISX’s chief executive, added: “From its inception, the goal of BISX was to list and trade Government securities. Therefore, this 20-year in the making achievement is a milestone, not only for the exchange but for our country. I am delighted that we have finally accomplished this goal.

“There were some challenges along the way. However, the three organisations worked together to arrive at this trading day. We have prepared a system that will allow for the seamless trading of BRS (Bahamas Registered Stock), utilising our electronic trading system in a regulated electronic exchange. Today is certainly historic.”