By Richard Coulson
One sign of a healthy economy is a vigorous capital market. By that standard our economy, while not failing, is far from blooming. Our capital market, still in its infancy, is just beginning to do its job of mobilising the country’s financial resources for productive purposes. Government could make a quick decision to help, but will it?
By ‘capital market’ we mean a facility that encourages private companies and the public sector to grow by tapping available funds widely held by our citizens and institutions; and that gives savers a better way to use these funds than simply investing in bank deposits (liquid but now giving abysmally low yields) or real estate (often profitable but always illiquid).
Although a few companies ‘went public’ before this century, it was the creation of the Bahamas International Securities Exchange (BISX) by a private placement of shares in 1999 that marked the intended kick-off of our capital market. Unfortunately, the BISX Board of Directors allowed it to get off on the wrong foot, spending heavily on consultancies and travel to develop international contacts before establishing firm local business. The resulting near-bankruptcy was staved off only by a re-financing from the original shareholders and Government stepping in as an investor.
Since then, BISX has been more tightly focused under its committed chief executive, Keith Davies, and present total staff of only four persons. Nevertheless, despite their efforts, the results still do not show a truly active market. Equity shares (and a few bonds) of some 24 local companies are listed on BISX, with total market capitalisation of $3 billion. But the trading volume of all these companies was only $17.4 million for the full year 2013. By contrast, in 2011, a single initial public offering (IPO) for Commonwealth Brewery, raised $60 million. Clearly, there is no lack of funds awaiting deployment, but the low trading volume reveals a singular lack of interest in buying shares of companies already listed.
Based on the trading figures, BISX headlines that its ‘All-Share Index’ increased by 9.06 per cent in 2013, and provides a chart showing other well-known indices like the Standard & Poor’s 500 (up 29.6 per cent). Not only is the BISX increase much less than the S&P, its pricing must be taken with a large grain of salt. Many of the 24 stocks that compose the BISX Index seldom trade, so on any given day their quoted price is purely hypothetical, using a quote taken from many days or weeks previous. On a good trading day, seven or eight companies may trade, against other days with no trading whatever. The average activity per trading day in 2013 was about $90,000.
The low trading volume is aggravated by off-market direct dealing that does not go through a broker-dealer or showing the trade on BISX. It has been estimated that trading on BISX could double if this practice were outlawed. We have suggested to Hillary Deveaux, director of the Bahamas Securities Commission, adoption of a rule requiring that all share trades of BISX-listed companies pass through the BISX system. This rule would not simply increase brokerage commissions and BISX trading fees, but would improve price transparency resulting from higher trading volume. Low volume has been a major factor inhibiting the growth of BISX. Issuers believe the infrequent trading does not allow the share price to reflect a company’s true value, and investors are unhappy to be locked into a share with no prompt exit route if needed.
Another peculiarity of our market is the failure of share prices to react to company news. Are our investors asleep? We wonder why the smart analysts at our wealthy pension funds, for example, have not driven up the price of Cable Bahamas after it projects a substantial earnings increase from its new Florida operations.
Of course, the best future path for BISX will be the listing of more local companies, giving investors a wider choice. This is easier said than done. Although the effort and expense of launching a public offering in the Bahamas is not onerous – certainly not compared to the horrendous cost and regulatory complexities of an IPO in the US – still we have deep-seated cultural issues that discourage IPOs. Many local businesses could attract public investors – Kelly’s, John Bull, Lowe’s Pharmacies, Furniture Plus are possible examples – but they enjoy a long tradition of close family control with reluctance to give outsiders even a minority stake. Often they have no need for new funding, or can just call their bank for an increased line. But even these closely held companies may eventually want to offer shares with a quoted market value to employees or to the founder’s heirs, or may decide that it is simply good for business to spread the wealth. Both Messrs Deveaux and Davies spend part of their working hours explaining the reasons for an IPO to hesitant corporate owners, in addition to informing school groups and other potential investors. A Pan-Caribbean Investor Education Week is planned for later this year.
One investment banker sees a modestly rosy future for public shareholding. With signs that the recession is gradually receding into the past, he notes a decline in forced selling by cash-strapped shareholders who may now have funds to invest. A large preference share offering by Cable Bahamas is on schedule, and a new IPO in the second quarter is in the planning stages. It is at least possible – as we have often urged – that Government will cause the new ‘foundation’ to publicly offer the 2 per cent of BTC shares that it acquired from Cable & Wireless, an issue that might be worth as much as $50 million. If Baha Mar lives up to its hiring expectations, it could create a new slice of wealth eager to invest or create new businesses, just as Atlantis did 15 years ago.
Meanwhile, BISX has to fund itself. It is not a public service but a commercial enterprise careful with its shareholders’ invested capital. With higher revenues, it could do much more in marketing, media publicity and product development. Mr Davies continually explores new opportunities for the exchange. It has listed 25 mutual funds with assets of approximately $550 million. They provide good income for BISX in the way of listing fees, but represent primarily foreign investments with no impact on the local economy. From his recent trip to Dubai and Abu Dhabi, he sees the possibility of mid-East investors using BISX for international trading. Locally, he has been promoting the issuance of commercial paper and easier rules for listing smaller, newer companies, although these initiatives have made little progress. Relaxing exchange control to permit freer inward investment in BISX securities by non-Bahamians has been perennially sought, and resisted by our financial authorities.
There’s one clear step that could be a transformative event for both BISX and the investing public: a Government decision to list its several hundred million dollars of Registered Stock and treasury bills on BISX, and have our broker-dealers handle the placement of new issues and secondary-market trading of these securities. Mr Davies has been pressing this matter for five years with successive Ministers of Finance and has never had a clear answer, despite demonstrating that our Central Securities Depositary is technically equipped to handle the new arrangement. He has been told ‘yes, it seems like a good idea’, but the trigger is never pulled. Why not? On new issues, intensive marketing by securities firms would give Government as good a price as under the present archaic system handled by the Central Bank, and any lost employment there would be easily absorbed by the private financial sector. For the first time, investors and savers could actively trade in and out of a wide range of maturities, establishing a true ‘yield curve’ benchmark for Bahamian debt. Since Government is the largest shareholder in BISX, with 43 per cent, it should be overjoyed to see revenues increase from the new listing and trading fees. In short, we are baffled by the long inaction, as we can see only a no-brainer with no down side implications.
In most other developing countries with a young stock exchange, trading government securities is the first step, and often dwarfs trading in equities. It could be the same in the Bahamas - except for our prevailing inertia in decision-making.