The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

THE Bahamas and its taxpayers have paid a higher price “than we would like” in raising $600m from overseas investors to fill the government’s financial holes, the deputy prime minister has conceded.

K Peter Turnquest told Tribune Business that the government’s just-closed international bond offering had achieved “the best rate we can get at the moment” given the fall-out from the COVID-19 pandemic, near-total shutdown of the tourism industry and The Bahamas’ “junk” creditworthiness standing with both Moody’s and Standard & Poor’s (S&P).

The 8.95 percent interest coupon attached to The Bahamas’ $600m offering, which the government said was effectively oversubscribed by 83.3 percent based on the $1.1bn worth of investor “indications” received, is almost three percentage points higher than the six percent rate obtained the last time it placed such a sizeable foreign currency bond issue in late 2017.

This represents a near-50 percent increase in the interest rate that Bahamian taxpayers, via the Public Treasury, will have to service compared to what the government would likely have been required to pay in pre-COVID and “junk” downgrade times.

Both Mr Turnquest and Marlon Johnson, the Ministry of Finance’s acting financial secretary, told this newspaper that market reaction - and the $600m offering’s over-subscription - showed investors “still have confidence” in the Bahamian economy and the government’s ability to meet its sharply-increasing debt obligations.

The deputy prime minister pointed out that the 8.95 percent interest rate, and yield of 9.25 percent, was far better than the 12-15 percent coupon return being sought on Bahamian government debt at the height of the COVID-19 pandemic earlier this year when the global capital markets were rocked by lockdown uncertainty.

Maintaining access to financial markets through securing sufficient funding to help cover the government’s $1.327bn budget deficit, thus enabling it to meet its obligations including the civil service payroll form the foreseeable future, will have been the primary objective behind The Bahamas’ latest issue. Not to mention securing further US dollars to bolster the external reserves and the currency peg.

However, a “back of the envelope” calculation shows just how much damage COVID-19 and the credit rating downgrades have inflicted. If the $600m bond had been priced at the six percent rate obtained in late 2017, annual debt servicing costs would have amounted to $36m.

But now, at almost nine percent, the annual cost to Bahamian taxpayers will be around $54m - an $18m per year increase. This will amount to $180m in total extra interest costs over the first ten years of what is a 12-year bond, with the principal due to be repaid in three equal $200m annual installments beginning in 2030.

Ultimately, the extra debt servicing costs that Bahamian taxpayers will have to finance compared to what was obtainable back in 2017 are likely to total close to $200m. Mr Turnquest, though, said The Bahamas had little alternative but to pay a higher rate to compensate international investors for the perceived extra risk caused by the downgrades COVID-19’s impact on the Bahamian economy.

“I can say that we had a favourable reception,” he told this newspaper. “It means that people still have confidence in The Bahamas’ paper..... At the end of the day, this is a very unusual time, and with all the circumstances going on we believe we’ve gotten the best rate that we can get at the moment.”

Pointing out that interest rates attached to existing Bahamian government debt issues in the secondary market were “all the way up to 12-15 percent at one point”, Mr Turnquest added: “Anything trading above five to six percent is trading higher than we would like, but given all the circumstances we are faced with it’s a fair price.”

Mr Turnquest said the $600m bond offering is “the biggest chunk” of the debt financing that the government will seek to cover its $1.327bn deficit and finance the public sector amid the ongoing 50-60 percent drop in revenues below normal levels.

While this has equipped the government with sufficient funding to get through the 2020 calendar year-end, he confirmed that further borrowings will take place next year under the authority granted by Parliament when the 2020 budget was passed.

“We are looking at some additional financing options with some of the multilateral institutions,” Mr Turnquest added, referring to the likes of the Inter-American Development Bank (IDB). “We are also looking at some other private sector financing options.

“I think we’re still very well-placed. We’re happy with where we are, and how we were accepted by the market. Having access to the markets at a time like this is critical. We’ve been able to achieve what we wanted to achieve, so we’re in good shape in that regard.

“When we do these issues we try to bear in mind the maturities so we don’t have any significant ballooning [of debt principal repayment] in any one year, and manage the refinancing and repayments appropriately.”

Mr Johnson, the acting financial secretary, said the government will also seek some of the remaining financing necessary to cover the 2020-2021 deficit in Bahamian dollars from local institutional investors. With the administration seeking to “borrow as little as possible”, he added that tourism’s planned re-opening will soon indicate whether the amount approved by Parliament needs to increase.

“We were very pleased to see there remains ongoing investor interest in The Bahamas,” Mr Johnson said of the $600m offering. “We need to meet the government’s obligations on an ongoing basis and stay in line with cash planning and cash requirements.

“It signals that investors have confidence in the long-term prospects of the country, and that we remain a creditworthy destination for investors notwithstanding the two downgrades. As your credit rating goes, your interest rate goes. I think everybody appreciates what happened to get our credit rating where we are, but it is what it is.”

Mr Johnson added that the Ministry of Finance will be creating a so-called “sinking fund” where the government will “deposit monies on an ongoing basis” to finance the $600m bond’s principal redemptions when they start becoming due in 2030.

International market reports suggested that The Bahamas’ placement agents for the $600m bond, Credit Suisse and Royal Bank of Canada, spent three days last week locking down the interest rate for the offering. Discussions took place in the range of 8.5 percent to 9.5 percent, with the final coupon indicating investor and market appetite forced The Bahamas to settle for the higher end of this range.

The government, in a statement yesterday, said Mr Turnquest headed a team featuring Mr Johnson and Joy Jibrilu, director-general of tourism, who met with and briefed some 45 potential investors in the run-up to the bond offering. Mrs Jibrilu briefed investors on plans to re-open the tourism sector, alongside the typical fiscal and economic projections.

Some 140 investors participated in the $1.1bn worth of “indications”. The proceeds from the $600m bond will be used to finance the government’s 2020/2021 budgetary needs, and to repay a US$248m bridging loan provided by an international institution. This means the offering will add an additional $352m to The Bahamas national debt.

“Given the strong shock to the Bahamian economy caused by Hurricane Dorian and now COVID-19, we are satisfied with the successful pricing of this bond issue and the positive response from the investor community, which reflects the market’s ongoing confidence in The Bahamas,” Mr Turnquest said in the statement.

“Despite the interruption in our fiscal consolidation objective, the government is undeterred in its commitment to pursue a credible fiscal policy and achieve debt sustainability, and to pursuing the structural reforms that would release a strong level of economic growth.”