The Tribune

• Low bank rates ‘finally force’ investor action

• But lack of new investments needing funds

• RF projects $100m asset growth for 2021

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

An investment banking chief yesterday said record capital inflows of more than $50m received by his institution during 2021’s first four months have created “an excellent problem” it must now solve.

Michael Anderson, RF Bank & Trust’s president, told Tribune Business that low deposit rates are “finally forcing” both institutions and retail investors to move money out of the highly-liquid commercial banking system in search of greater returns elsewhere.

They are immediately being confronted, though, by a lack of alternative investment opportunities capable of generating the profits they desire. And Mr Anderson explained that this, too, is creating a problem for RF Bank & Trust as the lack of securities issues is causing an above-average build-up of cash in its mutual funds that is depressing their returns.

Revealing that the former RoyalFidelity Merchant Bank & Trust is forecasting it will grow assets under management this year by more than ten percent, or around $100m, the RF Bank & Trust chief said much of the capital inflow for 2021 to-date has been directed at its $300m Prime Income fund.

This fund, which focuses on investments in fixed income securities such as government bonds, corporate bonds and preference shares, attracted between $25m-$28m in new investor monies during the four months to end-April, taking the Prime Income’s total cash holdings to just shy of $60m.

Mr Anderson said this represents around 20 percent of the fund’s assets, more than double the traditional five to ten percent range, and RF Bank & Trust is eager to put much of this to use in what he hopes will be a “pent-up demand” for capital that matches the tourism equivalent.

Investments such as the $85m local component of Bahamas Power & Light’s (BPL) rate reduction bond (RRB), and Nassau Cruise Port’s bid to raise around $100m in bond financing, are projected to create a busy 2021 second half for the capital markets that Mr Anderson believes could fuel the growth injection that The Bahamas requires post-COVID.

“It’s been one of the drags on our investment funds. We’re bringing in money in anticipation of transactions, and those transactions have been delayed, so we’re building up cash,” the RF Bank & Trust chief told Tribune Business. 

“It’s reduced our returns. We were running at more or less 4.5 percent over the past few years, and maybe a big higher. It’s in the Prime Income fund where the amount of funds is building up. People are removing funds out of bank accounts, and preferring fixed income securities over equities.”

Mr Anderson said the Bahamian capital markets had generally enjoyed a good supply of new fixed income issues over the past 15 years but, the Nassau Cruise Port’s first $150m bond raise excepted, this had been choked off by the COVID-19 pandemic and “a lot of investment opportunities were put on hold”.

With the low interest environment now incentivising persons to seek returns outside the commercial banking system, he added that RF Bank & Trust was now “waiting to see these investment opportunities materialise” during what he believes will be “a more active second half”.

“Over the last 18 months, we’ve seen a strong build-up of funds as people look to put their money to work,” Mr Anderson said. These inflows had further accelerated over 2021’s first four months to the point where the Prime Income had received $25-$28m over that period, or an average of $5m to $6m per month.

“That’s creating a further cash drag on returns as we go into mid-year,” he told Tribune Business. “It’s an excellent problem. People are deciding to move money into investments. It’s a bit slower getting them returns than expected. We anticipate getting them those returns in the second half of the year, as it’s been a bit slow in the first half.

“I think it’s people finally getting to the point where bank deposit rates are forcing them to the banks and they need to find alternative opportunities. The amount of issues expected to come to market in the next 12 months is fairly significant. Hopefully it will encourage other issuers to come to market and help the economy grow.

“We have a build-up of outstanding issuances over the last 18 months because of the situations companies find themselves in. Those deals were put on hold, but we anticipate them coming to market in the next 12-18 months. It’s this idea of feast or famine, but it will not be too long before we need more. It will be nice to see more issues coming to market.

Besides BPL’s bond and the $24.5m in equity, and $100m worth of debt, required by the cruise port respectively, Mr Anderson said other capital raisings will likely involve Shell North America’s proposed liquefied natural gas (LNG) terminal and the local component of the capital required by the Grand Bahama Shipyard for its new dry docks.

Affirming that $60m of the Prime Income Fund’s $300m in total assets is accounted for by cash, the RF Bank & Trust chief said capital inflows in early 2021 had not just been confined to mutual funds but also embraced pension funds, education funds and other investment products.

“All of those were attracting higher inflows of funds of between $10m-$12m a month,” Mr Anderson told this newspaper, revealing that more than $50m was placed across the investment bank’s product line during the first four months of 2021.

“We have $1.1bn in assets under management, and are growing remarkably fast. We anticipate growing over 10 percent this year. That’s in the region of $100m in assets coming in this year.”

Mr Anderson, though, said commercial banks were now starting to compete in the capital markets space due to their inability to find qualified borrowers for the more than $2.3bn in surplus liquidity that they currently hold.

“What you will have seen more recently is the banks coming into that area where they are starting to pay back some of the preference share issues, as they did with Arawak Port Development Company and RoyalStar Assurance,” Mr Anderson said.

“The banks are stuck with money they can’t get to loan, so they are coming into that mezzanine space and exacerbating the problem because both sets of capital are coming into the same market.”

Mr Anderson added that securities issuers and their advisers will also have to work to stagger and spread out their capital raises so they do not compete for the same funding sources. He estimated that some $200m worth of transactions may come to market later this year in a country that typically only builds-up $150m to exploit such opportunities.