The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government is seeking bids from investment advisory firms to underwrite/manage the placing of “up to $250 million” in short-term securities into the Bahamian capital markets, Tribune Business can reveal.

The tender, which is already ‘live’, aims to kickstart an initiative 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.

The Request for Proposal (RFP), which has been seen by Tribune Business, also foreshadows the launch of a new government debt security - paper that will have just a one-month maturity.

Bids have to be submitted by March 20, and the RFP reads: “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.”

Simon Wilson, the Ministry of Finance’s deputy financial secretary, who is listed as the RFP contact, did not respond to Tribune Business’s e-mail seeking comment. Neither Michael Halkitis, minister of state for finance, nor financial secretary John Rolle, could be reached either.

The move ties directly to the Government’s goal, announced by Prime Minister Perry Christie in his mid-year Budget debate, of taking a more proactive approach to managing a multi-billion dollar debt mountain that is now approaching $5 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 before end-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 referred to in the new RFP 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 RFP said, indicating that it wants to “reach the broadest investor base”.

The tender says the winning bidder will also be allowed to structure ‘syndicates’ with other broker/dealers to assist in placing these securities.

Among the likely bidders are CFAL and RoyalFidelity, plus the capital markets units at Citibank, CIBC FirstCaribbean and Family Guardian.

Sources familiar with the situation, speaking to Tribune Business on condition of anonymity, described the Government’s plan as ambitious, but one that made sense given the prevailing environment.

With bank deposit rates at historically low levels, and more than $1 billion in surplus liquidity in the Bahamian commercial banking system, the sources suggested there was an abundant supply of capital seeking higher yields and returns.

The key, they said, was to find the “sweet spot” in terms of interest rate that would entice investors to leave the banks in favour of the one-month security and its counterparts.

They pointed out that the one-month security was almost unheard of in the Caribbean, with regional governments favouring three and six-month maturities.

Given its short lifespan, the sources said the returns on the one-month security only made sense, in comparison to bank deposits, for investors placing large sums of money.

While the Bahamian capital markets would need educating on the Government’s latest debt securities, the sources nevertheless praised the RFP as a good idea, suggesting the new paper would act as an alternative to Treasury Bills - the normal short-term financing mechanism.

These have historically been purchased largely by the commercial banks, and Tribune Business was told that the RFP’s intention was to get short-term government debt “beyond” this sector into a more wider distribution involving small retail investors.

The Prime Minister last month said the Government’s more proactive debt management, and the BGS listing on BISX, would produce annual savings of a minimum of 0.5 per cent per annum.

He added: “The overall impact of this initiative, as well as other cost savings and risk minimising initiatives, such as hedging yuan denominated debt and interest rate hedges, has led to a reduction in overall interest expense from 5.2 per cent in fiscal year 2009-2010 to a projected 4.8 per cent in the current fiscal year.

“This has translated into annual savings of $21 million, which have been directly allocated to deficit reduction.”