The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas Electricity Corporation (BEC) breached the financial terms of its existing plan $100 million bond issue, forcing it to seek a four-year waiver from investors.

Tribune Business can reveal that institutional bondholders have relaxed the conditions attached to their investments for a four-year period until end-September 2018, after BEC’s financial woes took into non-compliance with two of three key covenants.

However, this was not approved unanimously, as just 83 per cent of bondholders approved the waiver at an Extraordinary Meeting. Held on March 10, the gathering also discussed a proposal by the energy monopoly to redeem (pay out) $70 million of the $100 million bond principal.

Tribune Business understands that the proposal has been tweaked slightly, but a formal offer has been conveyed to the bondholders by BEC/the Government this week.

The minutes of the March 10, 2016, meeting, which have been obtained by this newspaper, reveal that BEC had fallen into non-compliance with two key financial ratios that it had guaranteed to maintain when the bonds were issued in 2006.

Apart from maintaining a net worth of no less than $165 million, BEC had also guaranteed not to breach a maximum total debt to shareholder equity ratio of 2.5:1.

“BEC’s 2014 audited financial statements reveal that its tangible net worth is $133.07 million, and the debt-to-shareholder equity ratio is greater than the 2.5:1, which CIBC [Trust Company] calculated to be 5.79:1,” the minutes reveal.

BEC has thus breached two key terms that are required to be maintained “so long as any bonds remain outstanding”.

However, Cecile Greene, BEC’s chief financial officer, was quick to counter CIBC’s figures, suggesting that the total debt to shareholder equity ratio was 3:1, not the higher 5.79:1. The former number, though, is still higher than the Corporation’s covenant.

Regardless, the documents reveal another unseen consequence of BEC’s financial weakness, namely its inability to meet guarantees and conditions previously agreed with investors/purchasers of its debt securities.

Bondholders present at the meeting included the National Insurance Board (NIB), Colonial Pensions Services (Bahamas), Insurance Company of the Bahamas and RoyalFidelity Merchant Bank & Trust, CFAL and its investment funds, the Bahamasair Provident Fund, Scotiabank (Bahamas), Providence Advisors and Andrew Flowers.

The meeting was held at the Goodman’s Bay offices of CIBC Trust Company (Bahamas), the trustee for the trust deed under which the bonds were settled.

Phillipa Delancey, CIBC Trust’s head of fiduciary services, told the meeting “that notwithstanding BEC is non-compliant with two of the three covenants, as it pertains to the bond themselves” it had met all its obligations.

These included the interest payments to the bondholders themselves, plus payments into the ‘Sinking Fund’ that will be used to redeem investor principal when it becomes due.

Ms Greene, meanwhile, blamed a change in accounting standards related to BEC’s employee pension fund for dropping the Corporation’s net worth below that set for the bonds.

“Those changes resulted in the restatement of prior years’ financials, and BEC recorded a $54 million increase in pension obligations, thereby reducing retained earnings by that value,” the minutes reveal.

“This resulted in the tangible net worth of the Corporation falling below the required level stipulated in the Trust Deed, as current year’s operations reported losses that further caused the total funded debt to net worth ratio going beyond the required level.”

Kriston Moore, representing Colonial Pensions Services (Bahamas), asked whether the financial covenants needed to be “waived indefinitely” or for a specific period of time. As a result, they were lifted for the four-year period that began on September 30, 2014.

BEC then unveiled its plan to repay $70 million of the outstanding $100 million in bond principal. The issue is split into three classes, Series A, B and C, and the utility proposed repaying the full $57 million owed on Series A, which is due to mature this year.

For Series B and C, both of which have $21.5 million in outstanding principal, BEC offered to redeem $6.5 million in each class, leaving $15 million - or a total $30 million - remaining to be redeemed.

The $70 million will be covered entirely by the existing Sinking Fund, which currently contains just over $84 million through a combination of bank deposits and Government bonds.

To cover the remaining $30 million, BEC proposes to continue paying into the Sinking Fund for their eventual redemption. And those bondholders who are left in Series B and C, which are due to mature in 2021 and 2026, respectively, were to be given an opportunity to buy into the Rate Reduction Bond (RRB) that forms a key part of BEC’s financial restructuring.

Tribune Business understands that BEC this week modified its offer slightly. While still redeeming the same $70 million total, BEC is now offering to redeem just $52 million of the Series A bonds, leaving a $5 million balance it will repay by year-end via quarterly instalments.

The payments to Series B and C bondholders will increase to $9 million each, leaving just $12.5 million to be dealt with the same was as before. If all bondholders agree, and administrative requirements are met, Tribune Business understands the $70 million redemption will take place on Friday, April 15.

Deepak Bhatnagar, head of the Government’s energy reform process, and also executive director on the newly-formed Bahamas Power & Light (BPL) Board, also divulged several details regarding the proposed RRB bond issue.

“BEC intends to raise $600 million on the local and international markets (Canada, the United States and United Kingdom) through the new Rate Reduction Bond,” the March 10 meeting minutes state.

“Mr Bhatnagar advised that the new Rate Reduction Bonds are likely to be for a term of not less than 25 years. The Bahamian dollar bonds will be at a rate equivalent to the Prime Rate, and the US dollar bonds will be tied to the Bahamas’ sovereign bonds.”

The Bahamian Prime Rate is 4.75 per cent currently, meaning that RRB purchasers - as it stands currently - will gain an interest coupon 200 basis points lower than the 6.43 per cent to 6.56 per cent spread offered on the current $100 million issue.

Tribune Business’s contacts suggested that the RRB will likely now be placed in the 2016 second half, given that there had been no formal announcements as to who the foreign and local placement agents are.

Several sources suggested that a combination of Bank of America, Credit Suisse and FirstCaribbean International Bank has emerged as the favourite to place the $500 million international component of the RRB, but that has yet to be confirmed.