The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government and its advisors are trying to gauge capital market appetite for up to $250 million worth of short-term securities, which they intend to start issuing in July-August 2015.

Michael Anderson, RoyalFidelity Merchant Bank & Trust’s president, yesterday confirmed to Tribune Business that he had initiated a “market read” in an effort to make the new government debt securities more attractive to the market.

RoyalFidelity, which won the bid to underwrite/manage the placing of these securities into the Bahamian capital markets, is seeking feedback from banks and other licensed broker/dealers on the dollar value that their clients would likely subscribe for.

It also wants to gain an indication of the pricing (interest rates) that would make these securities enticing to investors.

Mr Anderson told Tribune Business: “What we want to try and do is make it as attractive as possible.

“We’re trying to get a better market read, and get an assessment of what the market appetite is. The idea is that the large banks and larger broker/dealers participate as part of a large syndicate, getting them all involved, and they will be able to solicit investments from their customer bases.”

Tribune Business previously revealed that the initiative is designed to further reduce the Government’s debt servicing (interest) costs for its 2015-2016 fiscal year by letting the market - rather than the issuer - determine the price.

It also involves the creation of a new government debt security - paper that will have just a one-month maturity.

Mr Anderson confirmed that apart from the 30-day paper, the $250 million worth of securities will also include paper with three and six-month maturities.

“I’m still awaiting feedback from many of the broker/dealers and the banks, so that I can arrange a meeting with the Government to discuss it,” he told Tribune Business.

“The initial offering is expected in July or August 2015, which is the beginning of the Government’s new fiscal year. The idea is that next year, between July 2015 and end-June 2016, the Government will look to raise up to $250 million.

“At this stage, we don’t know the amount that will be made available or the rate. The Government’s interest is in reducing the cost of the funds it raises, and we want to make it an attractive investment option for people in the markets.”

Mr Anderson described the short-term government paper as “a timely issue”, given that the relatively low deposit rates being offered by commercial banks meant investors were seeking alternative, higher-yielding returns.

And, with qualified borrowers in short supply, the RoyalFidelity chief suggested that the new securities could prove an attractive investment option for the banks themselves.

Unable to lend out money, Mr Anderson suggested the new government securities might offer banks a viable alternative to keeping money at the Central Bank.

“For the Government to come out, it might be a good time, a good option,” he told Tribune Business.

“It’s a timely issue in terms of the banks recognising where they are, and their inability in terms of paying attractive interest rates to people.

“It’s a product that will likely be well-received by banks and other institutional investors who have funds they need to invest, and there are not any alternatives,” Mr Anderson added.

“It will give them a potentially higher rate of return. And the banks are sitting on so much money they can’t lend out, because the credit side of the market has not returned, with not enough people qualifying to lend to.

“As employment improves and borrowers are able to meet their requirements, the banks will return to lending. At the moment it’s just very difficult for them.”

Outlining its objectives for the new securities, the Christie administration said in the underwriting tender document: “The Government of the Bahamas is soliciting proposals from qualified underwriting firms for its proposed issuance of up to $250 million in short-term securities on a rolling basis, to accomplish its objectives of lowering the overall cost of its debt during the fiscal year 2015-2016.

“The tranches of the securities will be one, three and six months, and they will be issued over-the-counter, fully de-mutualised, with a minimum denomination of $5,000 at a coupon rate influence by demand.”

The move ties directly to the Government’s goal, announced by Prime Minister Perry Christie in his mid-year Budget statement, of taking a more proactive approach to managing a multi-billion dollar debt mountain that is now more than $6 billion.

It is increasingly looking to the Bahamian capital markets, and the forces of investor demand and securities supply, to set the interest rate coupon (price) for domestically-issued debt in the belief this will reduce servicing costs.

The Christie administration has the same targets for its new Bahamas Government Stock (BGS) instrument, $200 million of which will have been issued by the end of June.

The BGS debt will be listed on the Bahamas International Securities Exchange (BISX), and its subsequent trading by investors will again let market forces determine the price and, ultimately, establish a yield curve.

It is unknown whether the ‘rolling’ $250 million worth of short-term securities will be listed on BISX, but there are further common objectives with the BGS issues - namely to broaden the market for government debt beyond institutions to include retail investors as well.

“The Government will require as part of this proposal the development of an institutional and retail investor marketing plan that will result in the most favourable interest rates on the obligations,” the tender said, indicating that it wants to “reach the broadest investor base”.