The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government’s financial advisers yesterday estimated it will take three years for Bahamian investors to start treating its new BGS security as a “normal investment vehicle”, after the first issue for the 2015-2016 fiscal year came in 28 per cent below target.

Michael Anderson, RoyalFidelity Merchant Bank & Trust’s president, told Tribune Business that last week’s Bahamas Government Stock (BGS) issue raised $72 million, instead of the $100 million goal.

Despite missing the target, Mr Anderson said $72 million would normally be considered “a nice amount to get” given the relatively small size of the Bahamian capital markets and the sums raised in other securities offerings.

Emphasising that the Government was not displeased with the BGS issue’s outcome, the RoyalFidelity president said the security - designed to replace Bahamas Government Registered Stock (BGRS) - would gain “more traction” as the interested investor base deepened.

Mr Anderson said RoyalFidelity was trying to interest non-bank institutional investors, such as pension funds and insurance companies, to take a greater percentage of BGS issues.

He added that the market had yet to perceive the BGS as “a normal vehicle” for investment, and said investors needed to start trading the issues already listed on the Bahamas International Securities Exchange (BISX) more frequently in a bid to ensure pricing (interest coupons) is ultimately determined by the market.

“I thought we were going to get $80 million, but it was finalised at $72 million,” Mr Anderson told Tribune Business of last week’s BGS issue, which closed on Wednesday.

“I was reasonably comfortable that we were going to get $80 million, and then we lost one large investor. We had some people who said they were coming in, and we didn’t get the full subscription from the banks that we were looking for.”

He added, though, that RoyalFidelity and the Government were far from dispirited with the outcome. The $72 million raised is 36 per cent of the total $200 million in debt financing that the Christie administration is seeking to raise during the 2015-2016 fiscal year from the BGS, and there are at least two more issues set for the New Year.

“Under normal conditions, $72 million is a nice amount to get,” Mr Anderson said. “The Government wanted $100 million, but I don’t think they’re unhappy with it. It’s still a bit of a learning arrangement for them.

“I’d like to get $100 million, but $72 million is a good raise. It’s more than you typically raise in public company offerings, so it’s still a good result in a relatively small market. It’s very difficult to know what liquidity is available for these transactions.”

The RoyalFidelity president told Tribune Business it was likely to take Bahamian investors three years before they became truly comfortable with the BGS as the Government’s medium to long-term domestic bond/debt security.

“It’ll be one of those areas that, over the next two to three years, develops more traction and gets more interest from the market,” Mr Anderson said.”It’s still early days, and is not a normal vehicle for them [investors]. It becomes more standard.

“I’ve kind of said that we will grow this market from a three-year base to become normal. We’ve gone through the first year, and it’s not yet normal.”

The inaugural 2014-2015 fiscal year saw the Government raise $200 million via its three BGS issues, all of which are oversubscribed. Two of those offerings are now listed on BISX, with the third on the way, and they will soon be joined by last week’s $72 million issue.

“I’d like to see them traded on the stock exchange, maybe at a discount or premium to the [issue] price, and see what the market makes of it,” Mr Anderson told Tribune Business.

“We want to see it start trading to develop a yield curve, and see what the market requires, so rates are determined by the market rather than someone setting the price.

“We felt we would have to price it for three years until people start trading the BGS. We haven’t seen trading in that security yet. It’s relatively new, and it will take a little while for people to change.”

Mr Anderson explained that BISX had effectively replaced the Central Bank of the Bahamas as the ‘secondary market’ for the trading of BGS bonds, another adjustment that investors will have to become used to.

“We’re changing the game for people,” he told Tribune Business. “It doesn’t automatically translate into people buying the security on the market.

“As time goes on, we will see the market start to change, pricing change, and the price more at market rates than simply setting it.”

Mr Anderson said offerings of the BGS’s predecessor, Bahamas Government Registered Stock (BGRS), had been dominated by the likes of the National Insurance Board (NIB), the commercial banks and the Central Bank itself.

Few other institutional investors, such as pension funds, had participated in the BGRS issues to any greater extent.

Now, with the introduction of both the BGS and the shorter-term Treasury Notes (the replacement for the Treasury Bills), that nature of investor participation has changed.

Mr Anderson said commercial banks were showing increased interest in the Treasury Notes, and this required other investors to pick up the slack on BGS offerings.

He called on the likes of pension funds, insurance companies and other institutional investors to “play a bigger role” in BGS issues.