The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas’s country risk premium “is going up”, a leading investment analyst warned yesterday, revealing that the Government’s recent $300 million bond issue had increased the interest coupon on its longer-term debt.

David Slatter, Family Guardian’s vice-president of investments, yesterday said the relatively favourable pricing of the Government’s recent 10-year note had sparked a “sell-off” of already-placed bonds with a much longer maturity.

As a result, the “yield curve steepened as a result of this debt issue”, leading Mr Slatter to conclude: “The [Bahamas] country risk premium is going up.”

Speaking to Tribune Business at a Certified Financial Analysts (CFA) Society of the Bahamas luncheon, Mr Slatter said the 5.75 per cent interest coupon attached to the Government’s latest US$ sovereign bond issue had caused the market to re-price the Bahamas’ longer-term debt.

This was because the returns for investors who bought into the short-term, $300 million issue, were receiving almost the same rate as those who had acquired the longer-term, and more risky, Bahamas sovereign debt.

“It’s gone up by at least 0.3 per cent,” Mr Slatter told Tribune Business of the interest rates on the Bahamas’ longer-term debt. “Before that issue, the paper maturing around 2029 was approximately 5.9 per cent yield to maturity, and now the yield to maturity is 6.2 per cent.”

Mr Slatter said the rise “was an issue of price discovery”, as there had been no short-term issue in the market to establish a ‘front end’ yield curve until the $300 million issue was placed.

“Once that was priced, people realised the price of longer-term paper was too high, so there was a sell-off,” Mr Slatter added.

He said the Bahamas’ sovereign debt had been trading at a 13 per cent “premium to par” prior to the latest issue, but was now only enjoying a 7 per cent premium.

The implications, Mr Slatter said, were that the Bahamas’ country risk premium was now increasing, and that the Government would have to pay higher debt servicing costs for any future long-term sovereign bond issues.

The Government’s $300 million foreign currency bond issue was 20 times’ oversubscribed, attracting subscriptions worth $5-$6 billion.

And the 10-year bonds, set to mature in 2024, had been placed with an interest coupon of just 5.75 per cent - almost a full percentage point lower than the initially projected 6.5 per cent.

Mr Slatter, meanwhile, said a key driver of future Bahamas country risk assessments would be its US dollar cash inflows from tourism and foreign direct investment (FDI).

A key factor impacting both was crime, he added, and in tourism’s case its competitiveness will also be influenced by labour productivity, combined with labour and utility costs.

Shana Lee, a KPMG associate director and head of its valuation services, showed how three different models ranked the Bahamas as having the third best country risk profile in the Caribbean - behind only Bermuda and the Cayman Islands.

This nation was placed ahead of Barbados, Trinidad & Tobago, the Dominican Republic, Cuba, Suriname and Jamaica.