The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Arawak Port Development Company (APD) has decided to keep the $15 million oversubscription from its recently-completed preference share offering, a top investment banker yesterday saying he “doubted” whether its low 5.5 per cent interest rate could be matched.

Michael Anderson, president of RoyalFidelity Merchant Bank & Trust, which placed the $36 million APD financing, said few - if any - other potential issuers had the characteristics, and investment climate, to achieve such low capital costs.

Suggesting that even APD may have struggled to achieve its 5.5 per cent interest coupon had the issue taken place several months later, Mr Anderson effectively conceded that it had set a record ‘low’ in the Bahamian capital markets in terms of pricing/investor returns.

He added that future capital markets borrowers may not be so lucky, especially as Bahamian interest rates are expected to follow their US counterparts higher in coming years.

And Mr Anderson said that by raising $36 million, some $15 million above its $21 million target, APD would likely restructure its financing plans.

The offering, he added, had given the BISX-listed Nassau Container Port operator more “flexibility”, and the ability to access more bank financing - especially short-term credit - if it so wished.

“The timing of the APD offering was excellent, because it happened when there was a high level of liquidity in the system, and a number of people with bank deposits had made clear they were looking for alternative investment opportunities,” Mr Anderson told Tribune Business.

“Even though the initial perception of a 5.5 per cent interest rate was that it was low, the fact we were able to raise $36 million was testimony to APD’s high level of credibility as a company.”

Effectively, the low interest rate environment (minimal bank deposit returns) combined with the high level of surplus assets in the banking system, and APD’s attractiveness as a fixed income investment, to guarantee the offering’s success despite its low price.

The port operator’s 25-year monopoly on New Providence port operations, and its guaranteed 10 per cent internal rate of return (IRR), gave preference share investors confidence their returns would be paid.

But, asked by Tribune Business whether other companies would be able to achieve such a low cost of capital, Mr Anderson said this was unlikely.

“Other companies can look to APD as an indicator, but few in this market will be able to get the same sort of rate,” he explained.

“I doubt we’ll see 5.5 per cent on a fixed-note basis again, at least not in the short-term. The timing of the APD offering was excellent for them, and if they had come to market in another month or two, I don’t know if they’d be able to do it again.

“It’s not dissimilar to last year when the Government came out with a fixed security at just over 4 per cent, yet traditionally they’d used a variable rate and a small premium to Prime They were able to move to a fixed-rate.”

Mr Anderson suggested that government issue had been a “one-off”, as it had not been back to the capital markets with a similar offering since.

The RoyalFidelity chief said APD had also been aided by the absence of competing capital markets fund raisings, the previous one having been Grand Bahama Power Company’s $32 million preference share issue that closed in January.

“It was a combination of issues that resulted in a successful offering, and if we had another one these circumstances might not line up,” he said.

Mr Anderson noted that the interest coupon on 10-year US Treasury bonds had risen by 80 basis points, from 1.7 per cent to 2.5 per cent, at the same time as the APD offering closed.

“Our markets are decorrelated from the US, but do not entirely operate on their own,” he told Tribune Business. “The change in rates in the international market suggests increased rates in this market.

“There are limits on what people think are reasonable rates in this market. Low rates are coming to an end in this market, sooner rather than later.

“I expect Bahamian rates will adjust. There’s an expectation that Bahamian rates will adjust upwards in the next couple of years as US rates change.”

Acknowledging that the pricing of future capital markets offerings would be “interesting”, Mr Anderson said there could be “challenges” in matching investor and borrower expectation.

By raising $36 million via its preference share issue, APD will likely need a much-reduced level of long-term bank financing to pay out its $43 million bridge facility. A $20 million loan from Royal Bank of Canada had originally been contemplated.

“It’s possible going forward they may choose to finance through bank debt, as they have a reasonable amount available to them,” the RoyalFidelity president said.

“By taking more in preference shares it frees up credit lines with the bank, so they may take on more bank financing - especially short-term financing. It allows them flexibility in other financing requirements going forward.”

Mr Anderson said the issue had attracted “widespread interest” from other broker/dealers and investment managers. And, while it was “primarily placed” with institutions, APD’s preference shares had seen “a reasonable level of interest” from individual investors.