The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government’s third-ever Treasury Note offering raised almost three times’ its target amount, although its financial adviser conceded it would likely “take a couple of years” to broaden retail investor participation in this security.

Michael Anderson, RoyalFidelity Merchant Bank & Trust’s president, told Tribune Business that this week’s issue had been oversubscribed by 187 per cent.

It had set out to raise $7.5 million in short-term financing on the Government’s behalf, but ultimately “ended up with” $21.535 million in Treasury Note subscriptions.

Mr Anderson revealed that the sum raised would have been even higher had a credit union been able to participate via a $5 million investment.

“We’re short $5 million on this one because we couldn’t register once of the credit unions in time,” the RoyalFidelity president told Tribune Business. “They wanted to participate but couldn’t because they didn’t have a brokerage account.”

Mr Anderson revealed that RoyalFidelity was adjusting the structure of Treasury Note offerings, and the sums sought, based on experience of what market appetite would likely bear.

The Treasury Notes, as short-term paper debt, are split into 30-day, 90-day and 180-day tranches, with the interest coupon increasing according to the length of maturity.

Mr Anderson explained that the initial strategy had been to align issuance frequency with maturity, meaning that 30-day notes would be released every month; 90-notes every three months; and 180-day notes every six months.

A quick adjustment was required, though, as the initial Treasury Note offerings revealed that investor demand was concentrated in the 90-day and 180-day paper.

Thus RoyalFidelity ensured that this week’s third offering contained a mixture of 30-day, 90-day and 180-day Notes so that all investor appetites were met.

“We’re trying almost to put a monthly amount in the market and see what the appetite is,” Mr Anderson said. “As we went along, there were different appetites for different things.

“We’ll do the 30-day, 90-day and 180-day paper in each offering to see what amounts people want to invest.”

Investor demand in the third Treasury Note offering was again concentrated in the higher-yielding 90-day and 180-day paper.

Mr Anderson said the 30-day Notes attracted just $60,000 worth of investor monies, with the 90-day and 180-day components gobbling up $7.5 million and $13.975 million, respectively.

“The rate differential is driving traffic to the higher-yielding 90-day and 180-day paper, so it’s likely we’re going to continue to raise more money on those going forward when we don’t do a Bahamas Government Stock (BGS) offering,” Mr Anderson said.

BGS are the Government’s longer-term bonds, typically raising $50-$70 million per issue, but the RoyalFidelity president said monthly Treasury Note offerings, seeking between $7.5 million to $10 million a time, were likely as a means to generate short-term cash flow for the administration.

“The amounts that we will typically go out for on a monthly basis will be that small amount,” he added. “We don’t know what’s out there; we’re just trying to make it available.”

Mr Anderson also expressed hope that retail (individual) investor participation in the Treasury Note offerings would increase, especially given the higher returns compared to bank deposit yields, but acknowledged this would take several years to achieve.

He suggested that the 2.5 per cent and 2.25 per cent interest coupons attached to the 180-day and 90-day paper, respectively, were yielding between 50 to 100 basis point higher returns than the 1-1.5 per cent that banks are currently paying on deposits.

“We hope that over time people with bank deposits will see the interest rates from these securities as attractive compared to what they are earning from bank deposits,” Mr Anderson said of the Treasury Notes.

“For people sitting on bank deposits looking for investments, it’s a value add from an investment perspective.”

While the capital markets had received the new Treasury Note security “fairly well”, Mr Anderson said RoyalFidelity and the Government had yet to achieve their objective of broadening participation beyond traditional institutional investors, such as the National Insurance Board (NIB) and the commercial banks.

“It takes a while for people to get going,” he added. “We have more activity and people inquiring on it, but its not being picked up by the retail and institutional market,” he told Tribune Business.

“It’s being picked up largely by the banks and the credit unions. We’ve had individuals, but not many. Hopefully, we will broaden individual participation over time, but it will take a couple of years to do so.”

Treasury Notes are the Government’s new short-term debt security. They are ultimately intended to replace the Treasury Bill as the Government’s main source of liquidity/cash for short-term funding.

Apart from broadening investor access to government debt securities beyond government institutions, the Treasury Notes are also designed to provide the market with alternatives to bank deposits via their low-risk, higher yield characteristics.

For the Government, together with their BGS counterparts, the Notes represent a departure from the previous auction-based strategy to one where its debt its allocated using market mechanisms.

Mr Anderson added yesterday that the first BGS issue of the 2015-2016 fiscal year was due next month, although the amount, price and other conditions had yet to be finalised with the Government.

The BGS programme, launched in the previous fiscal year, features the Government’s longer-term bonds - a replacement for the former Bahamas Government Registered Stock (BGRS).