The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A Cabinet minister yesterday conceded that Bahamian investors are only interested in short-term government debt after a one-year issue was oversubscribed by 14 percent.

Senator Michael Halkitis, minister of economic affairs, told Tribune Business that the Central Bank had gone back out to market with a Bahamas Registered Stock issue that exceeded target by almost $5m just two weeks after a previous capital raise only generated 25 percent of its goal.

“The Central Bank went back out two weeks later on January 19th to raise $35m,” he said. “They raised $40m on a one-year issue. It appears investors prefer short-term. So investors are participating but is appears they prefer short-term.”

Mr Halkitis responded after Tribune Business revealed on Friday that just one-quarter of a recent $47.326m bond issue was picked up by the market. The Central Bank’s website, showing the results of a BGR bond issue that closed on January 13, 2022, reveals that just $11.986m was purchased by investors across five tranches with varying maturity dates and interest rates.

Surprisingly, given that Bahamian institutional investors and high-net worth individuals have shown an increasing preference for the Government’s short-term paper in recent times, the greatest interest was shown in 30-year bonds where $7.452m of the total $24.326m made available was acquired by the market. That, though, is still less than one-third of what was offered.

The subsequent issue, which launched on January 25 and closed two days’ later, raised $40.246m which was comfortably in excess of the $35.34m target. The issue matures in less than one-year, on December 14, 2022, and carries an interest rate of just 3.10 percent.

The one-year maturity highlights that increasingly risk averse Bahamian investors are shying away from the Government’s longer-term debt given growing concerns over The Bahamas’ fiscal health following the debt and borrowing blow-out produced by COVID-19 and Hurricane Dorian, which exacerbated the annual fiscal deficits incurred prior to 2019.

One Tribune Business source, speaking on condition of anonymity, told this newspaper that the $40.246m raise had been “a special offer” that was dated specifically “so banks could fit it in their portfolio”.

And another contact, also speaking on condition of anonymity, said they knew of institutions and high net worth clients who were seeking to reduce their exposure to government paper by selling off existing holdings as well as declining to participate in rollovers as issues came due for maturity.

“There’s going to be a crunch time,” the source said. “We’re seeing the pressure too. Clients don’t want to hold government debt. It’s going to be a problem that manifests itself. The Central Bank is the only one that has been providing liquidity in the secondary market, and there’s a fixed limit on its exposure to government paper.

“If you look at commercial bank balance sheets, they have had to take an impairment charge because of the credit rating downgrades and that’s going to become a problem, too. Nobody is being the long-dated paper. They’re only doing it to offset long-term liabilities with matching assets and investments.”

There were signs last year that the Government’s domestic financing sources may be tightening, when a $30m registered stock offering in August was only 40 percent subscribed, with just $12m taken up. The Central Bank picked up the outstanding $18m, but there are legal limits now constraining how much support it can actually provide to the Government.

And these developments are occurring as the Government faces having to redeem, or refinance/rollover, some $1.769bn in Bahamian dollar debt in 2022. That burden drops significantly thereafter, with redemptions of $348.1m and $309m in 2023 and 2024, respectively.

The Davis administration has been seeking to cajole Bahamas-based banks, pension funds, insurance companies and other institutional investors to increase their participation in the Government’s domestic debt market since taking office, as it aims to reduce the country’s reliance on foreign currency borrowing and the potential burden it places on the external reserves.

The Prime Minister last October accused the commercial banking sector of “betting against The Bahamas’ economy”, arguing that it needs to unleash the $2.4bn in surplus assets available for lending to help the private sector grow the economy out of its post-COVID slump.

And he made clear that the Government is looking to the banks, as well as other institutional investors such as insurance companies and pension funds, to reduce its reliance on foreign currency borrowing by drawing on some of this liquidity to finance its domestic Bahamian-dollar bond issues and short-term Treasury bill releases.

“The domestic market has a much larger capacity to support government debt issuances. We need our domestic financial institutions to show faith in the economy by participating significantly in the domestic financial market – and not just to lend money to the Government and its entities, but to make loans to Bahamian firms to allow them to invest and to grow,” the Prime Minister said.

“Domestic financial institutions choosing not to participate in the domestic market are in effect betting against the success of the economy. This economy cannot grow without domestic credit expansion.”

There are multiple other factors impacting the Bahamian banking industry and its appetite for government debt securities besides confidence in the economy. As industry source bluntly put it at the time, the Government’s dire financial position means there was “an inherent riskiness” associated with investing in its paper.

Many commercial banks are at or close to their “ceiling” or limits in terms of the amount of government securities they can invest in. These are imposed by regulatory and prudential norms that the banks must comply with or find themselves in serious trouble.

And The Bahamas’ fiscal and economic woes, which have led to multiple sovereign creditworthiness downgrades to so-called ‘junk’ status by Moody’s and Standard & Poor’s (S&P), have already impacted the banks’ income statements and balance sheets.

Commonwealth Bank’s 2020 audited financial statements revealed that 99 percent of its total $458m investments are in government bonds or related investments. Bank of The Bahamas took a $6.3m provisioning hit the same year due to a Moody’s downgrade, while Fidelity Bank (Bahamas) downgraded its government debt holdings to ‘stage 2’ for assessing expected credit loss.