The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The government is seeking a $200m guarantee from the Inter-American Development Bank (IDB) to underwrite the bulk of its foreign currency borrowing in the 2021-2022 fiscal year, it was confirmed yesterday.

Marlon Johnson, the Ministry of Finance’s acting financial secretary, told Tribune Business the Government had issued a Request for Proposal (RFP) seeking bids from major financial institutions to act as placement agents and financial advisers to a proposed $700m capital raise in the international markets.

The government is targeting late September/early October for the finance raising, which is likely to take the form of a sovereign bond, although the bidders are being asked to provide what they believe is the “optimal” time, pricing and structure for the issue.

“The Government of The Commonwealth of The Bahamas is considering an international capital market transaction as part of its fund-raising activities for fiscal year 2021-2022, and has requested a policy-based guarantee from the Inter-American Development Bank (IDB) to support a sustainable and inclusive economic recovery programme,” the RFP document, details of which were leaked online, said.

“The indicative size of the transaction is $700m, with the IDB providing a guarantee of up to $200m. The Ministry of Finance is pleased to invite your financial institution to submit proposals that would deliver the optimal structure(s) and splits in terms of placement and pricing, and maturity.”

The Ministry of Finance urged bidders to give “comprehensive coverage” in their submissions to “market conditions and timing” and the “structure/pricing” of any issuance. “The government is contemplating a launch of late September/early October,” the RFP added. ‘Please indicate views on the optimal timing for execution of the transaction, along with...... any potential challenges that might influence the timing.

“Without being prescriptive, the government is seeking the most optimal pricing structure(s). Please provide indicative pricing for transaction(s).” Mr Johnson yesterday confirmed that the RFP was genuine, telling Tribune Business when the details were read to him: “That sounds correct.”

He indicated that the IDB guarantee was not unusual, adding: “It’s a standard product that the IDB has to support sovereign lenders.” The proposed $700m bond comes as little surprise, given that the government has a $951.8m fiscal deficit to cover for fiscal year 2021-2022, and with the prime minister having said in the budget that the bulk of its borrowing would again be done in foreign currency.

However, it appears the government is already making plans ahead of the Budget’s approval by Parliament. The September/October timing indicates that the Ministry of Finance believes international capital market conditions have improved from the same time last year, when The Bahamas placed a $600m sovereign bond with an attached interest rate coupon of 8.95 percent.

Then-deputy prime minister, K Peter Turnquest, said The Bahamas and its taxpayers had paid a higher price “than we would like” for that financing, as the interest rate was almost three percentage points higher than the six percent rate obtained the last time the country placed such a sizeable foreign currency bond issue in late 2017.

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

A “back of the envelope” calculation showed 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, 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 unless that bond is refinanced at a later date. However, the government subsequently exploited “more favourable market” conditions to “re-open” the $600m bond and raise a further $255m in US dollars at a lower eight percent just months later.

One goal from the planned $700m capital raising will likely be to further boost The Bahamas’ foreign currency reserves and at least partially make-up the reduction in inflows until tourism has recovered from COVID-19.

While the government has little choice but to do this in the short-term, some observers are likely to become increasingly concerned about the increasing medium and long-term strain this could impose on tourism and other export industries to generate sufficient inflows to service a foreign currency debt that at end-December 2020 accounted for almost 45 percent of direct government liabilities.