The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Less than 30 per cent of the Bahamas Development Bank’s (BDB) outstanding loan portfolio was ‘performing’ at year-end 2013, with the taxpayer underwriting its operations via multi-million dollar annual subsidies.

The BDB’s 2013 financial statements, tabled in the House of Assembly yesterday, reveal that just $11.582 million worth of credit, out of a total $39.948 million-strong portfolio, was current at December 31 last year.

This meant just 29.7 per cent of the BDB’s gross loans were classified as ‘performing’, with some $25.499 million worth of credit extended to Bahamian businesses and entrepreneurs now past due.

While the BDB’s troubled credit portfolio is hardly a secret, less well-known is the extent to which the Bahamian taxpayer - via the Government - has been underwriting its financial woes with subsidies.

The accounts, audited by the BDO Bahamas accounting firm, reveal that the Government is paying both due principal and interest on the BDB’s own long-term debts, plus covering the difference between the bank’s lending rates and target interest spread.

The BDB owes $54.58 million in long-term debt, the majority of which comprises $46 million in bond issued to the National Insurance Board (NIB).

Throw in another $4 million in bonds issued to the Central Bank of the Bahamas, and the BDB - as noted in the financial statements - has exhausted its bond issuing capacity, which is capped at $50 million.

While the BDB’s ‘sinking fund’, representing monies set aside to repay these bonds, currently stands at just $18.374 million (a significant shortfall), it also has $4.35 million and $230,889 in long-term loans also owed to the Central Bank and European Development Fund, respectively.

Given the BDB’s effectively ‘insolvent’ state, with some $22.904 million in ‘negative equity’ shown on the balance sheet as at end-2013, the accounts make clear that it is the Government and taxpayer who have been paying the long-term debt on the bank’s behalf.

“The principal and interest repayments on the long-term debts due during the year amounting to $3.459 million are paid by the Bahamas government on behalf of the bank,” the BDB’s financials state.

“The Government has agreed to pay the long-term debts of the bank until further notice.”

The same payments amounted to $4.786 million in 2012, and they are only partially offset by the interest subsidies and government guarantee claims that the BDB has assigned to the Government in return.

In effect, the taxpayer recovered just $509,635 and $877,769 in 2013 and 2012, respectively, sums that paled when set against the long-term debt repayments.

As for the interest subsidies, the BDB’s accounts reveal that as a result of a 2001 government decision, the bank’s lending rate to Bahamian businesses should be pegged at between 1-2.5 percentage points above the Prime rate.

To cover the difference between this rate ‘cap’ and the BDB’s “normal spread of five percentage points”, the taxpayer-funded ‘interest subsidy’ evolved. These subsidy payments totalled $393,226 and $439,232 in 2013 and 2012, respectively.

The financial statements show that the BDB, which suffered a $2.513 million operating loss in 2013, and a $1.847 million net loss, owed the Government (and Bahamian taxpayer) some $15.702 million at year-end 2013.

A recapitalisation seems essential, but is unlikely to be desirable, given the fiscal situation. The BDB’s accumulated deficit at year-end 2013 stood at $52.137 million.

And one $73,917 BDB loan to “family members of key management personnel”, while fully secured, was classified as non-performing. No mention was made, though, as to the status of some $185,120 in loans granted to BDB management team members.

Given all this, it is not surprising that BDO noted that the Government’s ongoing financial support is key to the BDB avoiding the ‘going concern’ qualification.

“The bank has incurred significant losses and reduction of equity, due to the performance of its loan portfolio and loan provisioning,” BDO Bahamas wrote.

“While its liquidity and ability to meet obligations may be significantly impacted by the loan losses, the directors are satisfied that the bank is currently a going concern, and that the preparation of these accounts on that basis is appropriate due to the continuing support of the Bahamas Government.”

Some observers might argue that Bank of the Bahamas’ woes, where 39 per cent of its loan book is ‘impaired’, pale into insignificance when set alongside the BDB’s woes.

However, they would not be comparing ‘apples with apples’, for while Bank of the Bahamas is a commercial bank, the BDB’s role is to advance Bahamian ownership and economic development by lending to businesses primarily those in the industrial, agricultural and commercial sectors. Its activities, therefore, would be classified as attracting a ‘higher risk’.

However, close to two-thirds of the BDB’s outstanding loans are not concentrated in these sectors, but are instead focused on tourism (21.38 per cent) and the services industries (40.12 per cent).