The Tribune

• Lender’s $200m guarantee gets top credit rating

• To limit debt service costs on big chunk of raise

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas will this week seek to limit the debt servicing burden for taxpayers via an Inter-American Development Bank (IDB) guarantee that will underwrite most of its $385m foreign currency bond issue.

Moody’s, the credit rating agency, has given an ‘Aaa’ designation - the highest possible - to one of the two sovereign bond series that the Government will issue this week because some $200m is being underwritten by the IDB in return for this country’s “blue economy” reforms.

The guarantee, combined with Moody’s high credit rating for The Bahamas’ ‘series A’ bonds, should ensure that the Government is able to borrow the necessary foreign currency at a much lower interest rate than if it had to approach investors directly on the open market.

One well-placed source, speaking on condition of anonymity, suggested that the IDB guarantee will enable the Davis administration to potentially cut interest rates (debt servicing costs) associated with the borrowing by up to four percentage points. The multilateral lender’s involvement eases repayment risks considerably for investors, and they suggested The Bahamas could obtain an interest rate of 5.5-6 percent as opposed to 9-10 percent without the guarantee.

This, in turn, minimises the debt servicing burden associated with the two bond series for Bahamian taxpayers who are already faced with a collective $588m in interest payments to the Government’s lenders/creditors in the upcoming 2022-2023 Budget. While the savings will likely appear minimal in comparison to the latter figure, every little helps, and managing debt service (interest) costs is one of the Davis administration’s key objectives.

Moody’s, in a “rating action” issued on Friday, said the $385m debt capital raise is being divided into two so-called ‘series’ under the same borrowing envelope. Besides the series A bond, which will be underwritten by the IDB, The Bahamas will also issue a ‘series B’ Eurobond that will not be guaranteed.

The rating agency has thus assigned a ‘Ba3’ rating to the series B Eurobond, the same non-investment grade status as The Bahamas’ overall creditworthiness, given that there is no IDB guarantee for this portion of the debt. However, contacts suggested that - when combined with the 2 percent rate the IDB tie-up will secure - the overall interest cost will come in at around 5.5-6 percent.

Neither Michael Halkitis, minister of economic affairs, nor Simon Wilson, the Ministry of Finance’s financial secretary, could be reached for comment on the upcoming bond offering before press time last night. However, Moody’s confirmed in its assessment: “Moody’s has assigned a rating of ‘Aaa’ to the backed senior unsecured proposed bond issuance (series A bond) by the Government of The Bahamas.

“The bond is enhanced by a $200m credit guarantee provided by the Inter-American Development Bank for scheduled debt service payments. The IDB’s issuer rating is ‘Aaa’ with a stable outlook. The assigned ‘Aaa’ rating is based solely upon the unconditional and irrevocable guarantee of scheduled principal and interest payments provided by the IDB.

“Separately, the Government of The Bahamas will issue an additional Eurobond without guarantee (series B bond) under the same bond indenture as the bonds issued with the IDB guarantee. Moody’s has assigned a ‘Ba3’ rating to series B bonds in line with The Bahamas’ issuer rating.”

Separately, reports by Latin America Finance last night said the total amount sought by The Bahamas is $385m and due to come to market this week. Moody’s, meanwhile, providing further rationale for its analysis and assigned credit ratings, said the IDB guarantee and its “residual” effect on the series B bonds was insufficient to justify a higher credit rating on the Eurobond debt.

“The Government of The Bahamas plans a bond issuance, which includes a guarantee for one of the issued series. There will be a dual-tranche issuance under a single bond indenture, the proceeds of which will be used for general budgetary purposes, including the refinancing, repurchase or retirement of existing indebtedness, and to finance general development in The Bahamas,” Moody’s added.

“The ‘Aaa’ rating on the series A bonds reflects the credit strengths of the guarantee provided by the IDB, and Moody’s view that the terms of the guarantee meet our criteria for credit substitution. The guarantee expresses an unconditional and irrevocable commitment to pay due and unpaid scheduled principal and interest on a timely basis.

“A key element of achieving credit substitution is timely payment under a guarantee. The guarantee payment is triggered by a demand notice made by the indenture trustee, which will occur at least 12 days prior to the scheduled payment date. The IDB will need to make a corresponding payment no later than 11 days after receiving such demand notice from the indenture trustee. Moody’s considers this timeframe appropriate to ensure timely payment,” the rating agency said.

“The series B bond potentially benefits from the guarantee on the series A bond to the extent there is any residual portion of the guarantee after all payments are made on the series A bond. However, in Moody’s view, the potential value of this ‘guarantee residual’ is insufficient to support any uplift for the series B bonds above The Bahamas’ issuer rating.”

The IDB guarantee was left in place by the former Minnis administration, which had planned to use it to support a $700m foreign currency bond issue had it been re-elected to office. It was included in the former administration’s borrowing plan, and has been inherited by the Davis government which is now putting it to good use - albeit for a much-reduced amount - as it seeks to meet more of its financing needs in Bahamian dollars.

One contact, speaking on condition of anonymity, said of the imminent $385m issue: “I know they [the Government] have been working on a bond offering for some time. I understand that they are partnering with the IDB to guarantee a portion of what will go into the bond.

“My suspicion is that they’re trying to manage the interest rate. If you can cover it with a ‘blue bond’ with the IDB, you can get rates that are fairly low. If you go for something outside that, the rates will be fairly high. This will give you lower interest rates than if you did it on your own. If you did it on your own, they would start at 9-10 percent. With the IDB, it will be 2 percent.

“I imagine the combined rate [from the two series] will be 5-6 percent. That would be my guess. The net effect will be good, a lower interest rate, and that will help all of us because it’s less taxpayer dollars to pay back.” The Bahamas’ already-issued debt continues to trade at a significant discount compared to face value, while interest yields remain in the double digits.

The Government’s $825m foreign currency bond, some $600m of which was placed at 8.95 percent at the height of the COVID pandemic, yesterday closed at 77.51 - an almost 22.5 percent discount to face value - on the Frankfurt stock exchange. The yield demanded by investors stood at 13.3672 percent.

As for the $300m bond priced at 6.95 percent, which was the last issued before the pandemic, it is trading at a 24.48 percent discount to face value with yields standing at 12.3703 percent. The source added: “If it’s a blue bond, you have to be doing some kind of debt-for-nature type of swap where you agree to preserve some portion of the sea.

“This type of deal helps you to bring down your rate. You get concessionary funding for preserving nature. But it’s going to be interesting to see what the combined targets are to meet the Government’s financing needs. They have financing needs for next year, with the $564m deficit, and whatever the deficit for this year is. The financing gap is still substantial.”