The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government’s domestic debt issues were fully subscribed for the first time in almost three years during the 2022 second quarter, the Central Bank has revealed, arguing that “tepid investor sentiment” has been reversed.

The regulator, unveiling its market update for the three months to end-June 2022, argued that investor attitudes towards the Government’s paper had markedly improved with all Bahamas Registered Stock (longer-term bonds) and Treasury Bills (short-term issues) during the period more than fully subscribed.

This was the first such occurrence on a quarterly basis since around the time Hurricane Dorian struck The Bahamas in September 2019, with the Central Bank arguing that “this change in market sentiment was most evident in the increased demand” for long-term bonds with principal maturities of between 20 to 30 years.

However, the regulator conceded that Bahamian investor demand continues to be heavily skewed towards short-term debt due to perceptions that the risk associated with investing in government securities has increased markedly due to the fiscal blow-out caused by a combination of Dorian and the COVID-19 pandemic.

This has driven the national debt to upwards of $11.8bn, and resulted in multiple sovereign creditworthiness downgrades from Moody’s and Standard & Poor’s. Bloomberg News subsequently named The Bahamas among 19 “emerging markets” who may eventually struggle to repay their debts based on current prices (discounts) and yields demanded by investors.

The Central Bank report, meanwhile, said the short-term paper preference was exposed by the Government’s $185m Bahamian dollar bond offering last month, with the entire issue featuring either one or two-year principal maturities. More than half the placement consisted of one-year bonds.

“Domestic market activity improved during the 2022 second quarter, as investor participation surpassed that of the previous quarter, hitting a new high since the onset of the COVID-19 pandemic,” the Central Bank said of domestic government dent market conditions. 

“After nearly two years of tepid investor activity, the 2022 second quarter was the first quarter since the 2019 third quarter with a minimum absorption level of 100 percent for all tenors. This change in market sentiment was most evident in the increased demand for long-term paper, as the 30-year tenor’s subscription share increased to 44.7 percent during the 2022 second quarter versus 24.97 percent in the 2022 first quarter.”

All the Government’s bond and Treasury Bill issues during the three months to end-June 2022 were oversubscribed by an amount between 107 percent to 201 percent, although investors remain risk averse to longer-term maturities given the increased risk.

“Despite the increased demand on the far end of the yield curve, short-term Government paper (91 days, 182 days and one year) maintained its dominant market share. This was made clear at the end of the 2022 second quarter, when $185m of new BRS was introduced to the market. Market demand called for the new paper in one-year and two-year BRS, with approximately 57 percent of the take-up attributed to one-year subscribers,” the Central Bank said.

“Compared to the close of the 2022 first quarter, there was a net transfer of demand from the 30-year tenor to the five-year and ten-year tenors during the 2022 second quarter. The most welcomed aspect of this shift is the increased demand for ten-year paper, which had appeared to have fallen out of favour with the market over the past year.”

The Central Bank report backs much of what Tribune Business reported earlier this year and 2021 when it comes to the Government’s traditional Bahamian dollar debt investors - high net worth individuals and institutions such as the commercial banks, insurance companies, credit unions, pension funds and mutual funds - shying away from longer-term paper because the risk had increased significantly.

The Davis administration tried to cajole the banks into deploying more of their collective $2.8bn surplus liquidity into government paper, but many institutional investors are at or near their regulatory or prudential limits on how much they can hold. And they have already been forced to discount, and take haircuts on, their existing holdings due to the sovereign credit rating downgrades by the rating agencies.

Tribune Business reported earlier this year how, in February 2022, a near-$48m domestic bond issue saw only around $12m or 25 percent placed, although a subsequent $40m offering was fully subscribed. This provided further evidence of the “tepid” investor appetite referred to by the Central Bank’s latest report, although more recent BRS issues have produced better outcomes for the Government.

Besides last month’s $185m raise, a $55.5m BRS issue placed earlier this month was 100 percent subscribed. And the amount of 30-year paper that was placed exceeded the initial $28m target by more than 25 percent, coming in at $35.128m and accounting for 63 percent - nearly two-thirds - of the total sum generated.

“Market pressures from the continued demand for short-term paper, coupled with the decrease in availability for Treasury Bills - stemming from recent retirement of two special issues - drove yields downward during the 2022 second quarter, marking the first sustained decline in the 91-day rate since the 2018 second quarter,” the Central Bank said. 

“During the quarter, the 91-day average discount rate decreased from 2.888 percent to 2.866 percent, while the 182-day rate stood at at 2.9 percent. Benchmark yields remained unchanged for the third consecutive quarter, with institutional investors continuing to prioritise duration and exposure over yield pick-up, promoting secondary market price stabilisation.

“With the next benchmark repricing scheduled during the 2022 third quarter, the Bahamas government is keen on receiving feedback from the domestic market, to guide the way forward.” The Central Bank added that training and tests for the move to the Bahamas government securities depository will “ramp up” during the 2022 third quarter.

Improving Bahamian investor sentiment is critical to the Government meeting its borrowing goals for the 2022-2023 fiscal year, as these aim to avoid the international foreign currency bond markets entirely. As a result, the plan’s success or failure hinges on how much it can raise locally.

“Of the $1.761bn in gross financing requirements, approximately $996.1m (56.6 percent) is to be sourced in Bahamian dollars and the remaining $764.7m (43.4 percent) in foreign currency,” the borrowing plan said. “Bond redemptions in fiscal year 2022-2023 of $606.1m will be refinanced in the domestic market with new issuances. The Government also proposes the issuance of an additional $125m in domestic bonds, bringing the total issuance to $731.1m.”

It added that the Government plans to adjust the maturity of its issues to meet market demand, while seeking to push this out “to minimise refinancing risk and promote a sustainable debt path over the medium to long-term”. The remaining $220m will be sourced from commercial loans.

The majority of its domestic bond refinancing will take place in October 2021, when $200m comes due for rollover, with $100m maturing in both December 2021 and March 2022. Treasury Bill rollovers in the current fiscal year will total $3.428bn with some $45m in new money raised.