The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government’s plans for its $1.1bn bond proceeds cannot be “a one trick pony”, a senior banker argued yesterday, as the Opposition challenged whether it will have to seek Parliament’s approval for new borrowings.

Gowon Bowe, Fidelity Bank (Bahamas) chief executive, told Tribune Business it was critical the Government show a “strategic approach” to how the proceeds from its latest debt raise will be applied - especially if its first “priorities” do not pan out - after it revealed these will only initially to refinance $170.647m in existing bonds.

The Government, in a statement yesterday, said funds generated from last week’s $1.1bn bond placement will redeem just 21 percent of the total $813m in existing Bahamian sovereign debt that it sought to refinance. It said it has only accepted $170.647m worth of offers from investors to exchange their existing bonds for the new issue.

However, the release said the Davis administration “expects” to fully redeem, refinance and payout the two existing Bahamas sovereign bonds set to mature quickest - in two and three years’ time, respectively. The outstanding principal owed on these bonds, one of which is the Government’s most expensive with a 9 percent interest coupon, is collectively $194.345m.

While the Government did not identify the financing source that will fund this payout “as soon as reasonably practical” following the bond transaction’s settlement today, the $194.345m figure - when combined with the $170.647m involved in the bond ‘exchange’ - takes the total debt being refinanced to just over $365m.

And, when added to the $332m Grand Bahama Power Company debt that the latest bond is also refinancing, this accounts for some $697m of the $1.1bn bond proceeds. This, though, means that the Government has yet to explain how the remaining $400m balance from its latest debt issuance will be used.

Senator Latrae Rahming, the Prime Minster’s communications director, did not respond to Tribune Business requests seeking comment before press time last night. But Dr Duane Sands, the Opposition’s chairman, yesterday queried whether this will further increase The Bahamas’ national debt - a move that would require the Government to seek fresh approval from Parliament.

“At the moment, we still have some $400m not accounted for,” he told this newspaper. “What are they going to do? Is this new debt? Are they now going to go back to Parliament because this is not what they said they are going to do.”

At present, Parliament has only approved a borrowing resolution that authorises the Government to refinance the $200m “term” loan it took out to acquire GB Power, plus almost $132m in legacy debts on the electrical utility’s books that were left behind by the previous owner. Any transaction that increases The Bahamas’ sovereign debt will require a new Parliament borrowing resolution.

One fiscal source, speaking on condition of anonymity, said it was possible that the Government could use the $400m bond proceeds balance to reduce or payout other existing debts, which would eliminate the need for a new borrowing resolution as the Government’s (taxpayer) liabilities would not increase.

The proceeds could also be used for investment purposes, held as bank deposits, or even placed in the National Investment Fund. “There’s no real clarity as to what they are doing with regard to this transaction,” the source said. “What are they going to do with the rest of the proceeds of this bond?

“Unless they are going to use it to reduce existing debt, if not, that’s a net addition to the debt and it has to be approved, transacted and financed. The full picture is never explained. It’s very straightforward. Your bond was $1.1bn, you are planning to retire $365m and refinance $332m for GB Power. What are you doing with the rest of the proceeds?”

Mr Bowe said these unanswered questions are why the Government needs to clearly articulate a strategy for how the $1.1bn proceeds will be used. “I think the word is probably not transparency; it’s more strategy,” he told Tribune Business. “You would expect, given that they accepted $1.1bn in subscriptions for the new bond, they would have a tiered strategy.

“If all persons redeemed as intended, that would be $700m, and after that, you had GB Power. That was your first priority. You’d also expect, if that first priority did not pan out, you would have secondary and tertiary priorities for the use of those funds… What’s the strategic approach for us raising this debt money, and how are we going to utilise it? My hope is they have a series of strategic priorities.”

The Government’s stated goal in placing the $1.1bn bond was to refinance a total $813m in existing Bahamian sovereign debt, worth $813m and spread across five existing issues, at both lower interest rates and longer maturities. This would have reduced the debt servicing cost burden for Bahamian taxpayers and pushed the date for when investors are repaid their principal further out.

While the latter goal was achieved, with the new bond set to mature in some 13 years in 2039 compared to the existing issues that carry maturities of 2028, 2029, 2029, 2033 and 2038, it is unclear whether any interest savings were achieved. Four of the five existing bonds, wth coupons ranging from 6 percent to 7.125 percent, carried lower interest rates than the new issuance.

Tribune Business back-of-the-envelope calculations show the annual interest bill on the new $1.1bn bond, which carries a 7.7 percent coupon, is around $84.7m. This is higher than the combined interest bill for the five existing issues at their original principal amounts outstanding, which worked out to just over $58m.

The Government’s release yesterday revealed that, while it accepted 100 percent of the bonds tendered in the issues due to mature in 2028 and 2029, some $38.425m and $98.546m, respectively, it rejected all the $53.427m offered for refinancing by holders of the other bond due to mature in 2029. And it also accepted less than one-third, some $27.075m, of the $85.069m tendered by investors holding the 2033 bonds.

“I would not want the US dollar funds being held. We should be very strategic in accessing US dollar funds,” Mr Bowe told Tribune Business of the bond proceeds. “Artificially inflating the [Central Bank] reserves would give the impression of greater flexibility. We’d not want them to take on more foreign currency borrowing than they can extinguish…

“I think what is more important is their strategic priorities are listed - not only for bond holders and citizens but, more importantly, for anyone who assesses the credibility of the country. What we would not want to happen is any indication of an absence of strategic priorities when taking on borrowing. We have clearly set out plans for accessing foreign currency debt and how it is utilised.”

While the $1.1bn bond’s over-subscription by investors was positive, Mr Bowe reiterated: “We don’t need to take on more debt than we actually need to utilise at this point in time. The old adage: If you don’t stand for something, you fall for anything. That means if you don’t have a proper strategic agenda, you can be susceptible to using funds in a manner not best suited.

“We should be in a situation of using those funds for specific purposes, not as a windfall or adding to the surplus. It’s intended to reduce the national debt. We should address strategic priorities, and not achieving free cash flows that have not been earned.”

Mr Bowe said the Government needs to show that, through its debt management strategies, it is improving The Bahamas’ net present value of cash flow and reducing interest costs for Bahamian taxpayers. “You don’t get into this type of financing without having very strategic plans,” he added.

“It’s not a one-trick pony. It’s having multiple options on the table, assigning them a priority, and if the first doesn’t pan out you move on to the next one.”