The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The deputy prime minister yesterday slammed arguments that The Bahamas' $600m bond issue was over-priced as "pie in the sky thinking" while revealing $133m in debt repayments have been delayed.

K Peter Turnquest told the House of Assembly that the 8.95 percent interest rate attached to the Government's latest debt raise from the international capital markets, which Bahamian taxpayers must now repay, was the inevitable consequence of COVID-19 and this nation's downgrade to 'junk' status by the two international credit rating agencies.

Asserting that there was no escape from these realities, Mr Turnquest said the debt servicing costs incurred from this latest bond placement were inevitably higher because investors wanted greater compensation for the increased risk presented by The Bahamas' reduced creditworthiness and shutdown of its tourism industry due to COVID-19.

Pointing out that the international capital markets, not the Government, set the price for sovereign bond issues such as The Bahamas' $600m placement, the deputy prime minister said the interest rate was also a reflection of the price the country's existing debt was trading at in the secondary market.

"Prior to COVID-19, we had Bahamian foreign currency bonds trading on the international exchange. Our most liquid bond had a maturity date of 2028, and at the time of issue, these bonds were priced at 6 percent. However, the impact of COVID-19 had these benchmark bonds trading at 8.25 percent, a factor dictated entirely by market conditions," Mr Turnquest said.

"The idea that this would be ignored by the investor community when pricing a new issue, with an extended maturity date, is pie in the sky thinking." He added that the $600m issue has a clause enabling the Government to "roll over the debt early", indicating that it would seek to refinance at a lower interest rate if The Bahamas' economic, fiscal and credit rating outlook improves in the near-term.

The deputy prime minister was firing back at concerns that the Government had paid too much for financing that accounts for some 43 percent of the $1.333bn it has been authorised to borrow by Parliament during the 2020-2021 fiscal year.

Gowon Bowe, Fidelity Bank (Bahamas) chief executive, told Tribune Business that the Government could have obtained an interest rate "lower than 8 percent" on its $600m bond offering had it unveiled a debt management strategy to improve investor confidence in its ability to repay the debt and meet all other outstanding obligations.

And there has been an unrelenting campaign backing a proposal by Public Resources International, a US-based debt advisory firm that has worked on restructurings and other matters with governments before. It had offered the Government a $750m foreign currency bond, priced at 3.87 percent interest, which would be placed “with a major international bank” and funded by the global capital markets.

The proposed bond would have carried a “floating” rather than fixed interest coupon. Yet PRI argued this still produced a 3.5 percentage point savings rate for The Bahamas compared to the likely 7.5 percent fixed rate (it obtained 8.95 percent) such a bond would attract, thereby cutting the interest bill for Bahamian taxpayers.

It added that The Bahamas would be able to refinance the bond “without penalty” after three years, and said: “There is no floating rate risk for at least three years as the floating rate would have to increase 3.5 percentage points before fixed rate at 7.5 percent [making it] more advantageous than floating rate. No reputable economist considers this to be likely.”

Following the Government's decision to go with the rival $600m bond placed by Credit Suisse and Royal Bank of Canada (RBC), Public Resources and its chief executive, Miner Warner, came back to argue that this decision would cost Bahamian taxpayers an extra $90m in debt servicing costs over a three-year period compared to its own offer.

This, they added, was because the interest rate on the $600m bond was some five percentage points higher than the coupon attached to their floating rate proposal. Mr Warner and Public Resources also warned that there may be "consequences on future pricing" of Bahamian foreign currency debt issues because of the 8.95 percent being paid on the latest bond.

Their argument is that, via this latest debt placement, The Bahamas may have locked in a much higher interest rate pricing benchmark on all future capital raisings - especially since its 'junk' credit ratings, economy and tourism industry are likely to rebound any time soon due to COVID-19.

Other sources, speaking to Tribune Business on condition of anonymity, voiced similar pricing fears to those expressed by Public Resources. In particular, they suggested the 8.95 percent bond issue pricing was likely to impact the price investors will demand to buy into Bahamas Power & Light's (BPL) proposed $535m rate reduction bond (RRB) placement.

Mr Turnquest did not respond to Mr Warner and Public Resources International by name, although he was likely referring to them when he said: "There are many noisemakers in the market who wish to muddy the waters.

"While they are often motivated by vested personal financial interests, the Government of The Bahamas always places at the forefront the interests of the Bahamian people and the welfare of this nation."

The deputy prime minister and Ministry of Finance have not explained why they elected not to accept the Public Resources International proposal, although this newspaper has picked up suggestions that they baulked at the up-front fees being charged for arranging the financing.

However, Tribune Business was told that Public Resources International has not abandoned hope of working with the Government, believing that it will need to come back to it because the economy's slower-than-anticipated recovery will require more borrowing at lower costs.

Meanwhile, seeking to further justify the Ministry of Finance's decision to proceed with the latest bond issue, Mr Turnquest added: "We had several other options we considered, including a loan priced at 9 percent which we outright rejected.

"There was also a three-year offer for $600m which would mean having to come up with a $600m principal payment in year three or before. The short tenor would place substantial strain on the Government in the medium-term and not be consistent with proper liability management strategies."

Mr Turnquest said the Government had also obtained a one-year extension on the repayment of $96.8m in debt principal due to mature in the 2020-2021 fiscal year. And it had also exploited extension clauses to defer the repayment of a further $19.6m for six months.

"Therefore, principal extensions totaled $116.4m or 16.7 percent of the $696.6m budgeted principal payment for fiscal year 2020-2021," he said. "The Government also secured a 12-month extension of a $17m short-term facility with a domestic bank, which was originally due July 29, 2020."

Summarising the Government's borrowing activities for 2020-2021 to-date, Mr Turnquest said the Government has sourced a net $552m in foreign currency borrowings from the $600m bond and $200m via the Inter-American Development Bank (IDB).

Some $248m of the bond proceeds were employed to pay off a $248m bridge loan facility, while a further net $110m was obtained in short-term advances from the Central Bank of The Bahamas.

While the Government intends to seek most of its remaining $400m borrowing requirement this fiscal year from the domestic capital markets, Mr Turnquest conceded there were prudential and regulatory restrictions on how much banks, pension funds and insurance companies can hold on their balance sheets in terms of domestic bonds.