The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government should be able to fully place its $200 million Registered Stock issue “with relative ease”, a well-known investment analyst said yesterday, despite it being the largest one-time placement in recent memory.

Kenwood Kerr, chief executive of Providence Advisors, told Tribune Business that the bond issue - which has been split into nine different tranches carrying fixed interest rates of between 4-4.35 per cent - offered returns that were relatively attractive compared to current bank deposit rates.

While interest yields on the $200 million Bahamas Government Registered Stock (BGRS) issue were below the 4.75 per cent Prime lending rate, Mr Kerr said excess liquidity in the banking system - standing at $978 million at end-May 2012 - should be enough to absorb the bond placement.

And, with bank deposit rates much reduced, he suggested that the latest BGRS issue would prove attractive to retail (individual) as well as the regular institutional investors.

“I think they should be able to get it done with some relative ease,” the Providence chief executive said, when asked by Tribune Business whether the issue would be fully subscribed.

“There’s a lot of liquidity in the system, bank rates have declined on the investment and savings side, so you have a lot of individuals looking to maintain cash yields or a certain level of income gravitating to BGRS.

“They’ll be competing with the institutional investors coming in with reasonable size. $200 million is a relatively large amount, and I can’t recall in recent times when the Government has gone out for something of that size all at once,” Mr Kerr added.

“But I think it will still be taken up. The yields are Prime based, and not much lower.”

Excess liquidity in the Bahamian commercial banking system at end-May 2012 was higher than the $940 million level recorded for the same month in 2011, indicating that because of the absence of good lending opportunities, there are multiple surplus assets seeking a good investment return home.

Mr Kerr, though, noted that the Bahamas is something of an anomaly when it comes to interest coupons/yields on government bond paper, as these are higher than bank deposits despite being a better risk. In most other countries, the position is reversed, with banks paying higher yields on their deposits.

“The Government paper, the best credit, because of the lower risk attached should not be yielding more than the banks,” Mr Kerr told Tribune Business.

“At this point, because of where the market is, it’s very attractive paper.”

Tribune Business exclusively revealed on June 27 that the Government would be launching a $200 million BGRS placement this month, in a bid to raise much of the financing required to cover its projected $550 million fiscal deficit for 2012-2013.

The $200 million issue is divided into nine tranches with maturities ranging from five years to 19 years. The first $20 million tranche, carrying the lowest 4 per cent interest coupon, is set to mature in 2017. The last slice, worth $40 million and carrying a 4.35 per cent coupon, will mature in 2031.

One capital markets analyst, speaking to Tribune Business on condition of anonymity, said investors needed to understand that, with interest rates “at an all time-low”, and the BGRS issue carrying fixed-rate yields, the bonds could trade either at a premium or a discount. If it was the latter, investors could take a capital hit.

They also questioned whether, given the minimal difference between interest coupons on the short-term (five year) and longer term tranches, investors would be “less interested in the longer pieces”.

The National Insurance Board (NIB), together with banks, insurance companies and other institutional investors, typically buy the lion’s share of these BGRS or bond issues, as they are seen as ‘safe’ investments providing a decent rate of return that do not have to be discounted for solvency/asset ranking calculation purposes.