As the country begins the recovery after Hurricane Matthew, Richard Coulson says now more than ever the BISX needs to be reconstructed to help the Bahamian economy grow.
A recent newspaper headline blared a press release from Bahamas International Securities Exchange (BISX) that the exchange had reached $5 billion as of June 30 this year, backed up by graphs and charts on the BISX website home page.
The publicised $5 billion included $4.1 billion of ordinary share capital for the 20 listed companies.
Statistics like this don’t lie, but must be taken with a large grain of salt. Since there is no explanation of how this figure was calculated, it is subject to gross inflation. For example, while the total market capital of First Caribbean International Bank (CIB) is a huge $1.4 billion, 95 per cent of its shares are locked away with its parent Canadian Imperial Bank, leaving only five per cent - about $70 million - that can actually trade on BISX.
This inflation affects the much-touted BISX “All-Share Index”, comprising the market capitalisation of the 20 ordinary shares listed. BISX claimed a 7.67 per cent Index increase in the first half of 2016, and a chart compared it directly with the US Standard & Poor’s 500 index that increased only 2.69 per cent and with England’s FTSE 100 index, increasing only 4.20 per cent.
Obviously, it’s better to invest in the Bahamas!
In fact, the comparison is misleading. Those two indexes consist of shares that actively trade every working day in New York or London and thus provide a viable market price, while the share-trading pattern of our 20 Bahamian companies is highly irregular. None trade daily; some, like Commonwealth Bank (CBL), Freeport Oil (FCL) and AML Foods, trade weekly; while perhaps ten of them rarely appear on the trading screen. When have we last seen a price quoted for Bahamas Property Fund or Consolidated Water? Does an index with a universe of only 20 shares, many barely active, really make sense? To compare it to the S&P 500 comes close to deceptive advertising.
A BISX graph showing how the All-Share Index rose from about 1,600 in 2014 to 1,963.91 (precisely!) at June 30, 2016, cannot conceal that BISX is failing in its basic task of creating a capital market for Bahamian companies and potential equity investors. It periodically proudly announces the listing of a new international mutual fund - that’s fine, as it adds fee income, but contributes nothing to developing local investment.
Here’s the hard proof of BISX failure: of the 20 ordinary shares, only two have been listed in recent years, and both of them resulted from Government fiat. In 2011, Bahamas Breweries (BBL) was required to make an initial public offering (IPO) when its foreign parent, Heineken, acquired Burns House, and in 2012 Arawak Port Development (APD) was launched as a public-private partnership. Both these companies were welcome additions to the BISX stable and have done well, but the fact remains that not since 2005 has a local company voluntarily chosen to list on BISX. In the United States about 55 per cent of the adult population has been estimated to hold publicly traded equities, either directly or through mutual funds. What would that percentage be in the Bahamas? Maybe five per cent? Even a rough estimate is impossible, since BISX does not require any listed company to reveal the number of its shareholders; while in the US public companies routinely disclose this figure as well as the percentage held by institutional investors.
BISX could demand our pension funds to report their holdings of listed securities, but has failed to do so.
Spurning BISX results from one main factor: lack of liquidity in most of the listed shares. Potential investors are scared away through fear of being unable to sell, and therefore company owners are reluctant to float a new issue because it will trade unevenly. We have innumerable closely held enterprises who probably enjoy the stability and profitability to qualify for an IPO: Kelly’s, John Bull, AID, Marathon Mall, Super Value, Asa H Pritchard, Furniture Plus, for example. But if they need expansion financing, they find it easier to tap internal funds, or turn to a bank loan, rather than incur the expense and obligations of a BISX listing.
The Chairman of one major company told me that his executives had no interest in a stock option scheme - because of liquidity doubts, they simply prefer cash bonuses. In contrast to the United States, there is little public confidence in capital growth, despite several success stories like CBL, and BISX is rarely mentioned in any analysis of our economy.
Since late last year, BISX management has been working on many improvements to its website to give better information to all market participants, but failed co-ordination with the board of directors has kept these steps from seeing the light of day. As a result, BISX - “the first stock exchange of the 21st century” (from the automated telephone receptionist) - still suffers a static website that is primitive compared to our closest Caribbean neighbour. Googling Jamaica Stock Exchange (JSE) brings up a sophisticated presentation of full-colour illustrations, topical stories and real-time securities prices flowing across the page. The smaller Barbados and Trinidad exchanges are not far behind.
The long-gestating improvements to the BISX website (and to the daily newspaper chart) will be welcome, but only cosmetic. More fundamental changes will be required to solve the basic problem of illiquidity - by getting more people trading, and more companies listed. Has BISX ever proposed to the Government that the annual listing fee, usually between $5,000 and $10,000, be credited against a company’s much larger business licence fee? Does BISX argue forcefully for privatising and listing the major public corporation like BTC, Bahamasair and ZNS? And what about the commitment that when American giant Sysco bought Bahamas Food Services it would float a sizable stake as a public offering, supposedly by 2016?
While our Securities Commission has announced plans to initiate the “crowdfunding” method of financing new ventures through simplified issuance procedures, BISX has not taken any role in these plans. After speaking over several years about creating a “junior market” for small companies, the BISX CEO has never come forward with a specific plan. The initiatives taken by the Chamber of Commerce and Government to assist venture small and medium enterprises have received no backing from BISX.
BISX has appointed five “members” who enjoy the exclusive right to deal in BISX-listed securities and earn brokerage commissions. But BISX imposes no obligations on these substantial firms - including Royal Fidelity and Colina - to play the essential role of supporting trading in listed equities, like the Designated Market Makers on the New York Stock Exchange (NYSE). As a result, we see frozen trading in popular shares like Cable Bahamas (CAB), where over 20 unfilled sell orders totalling 102,000 shares find no buyers, even though the requested sales prices are near the last traded price. In any mature exchange system such a pile-up of orders would be unthinkable for a solvent company.
Is our stock exchange well run? It is owned and managed by Bahamas International Securities Exchange Ltd, incorporated here in 1999. Aside from the scant information shown on the website (45 shareholders and names of CEO and Chairman), the investing public knows nothing about this company. Who are the shareholders and directors? What are its earnings and expense ratio and capital structure? Does it pay dividends? How is corporate governance handled? BISX rules require that all this information be disclosed for its listed companies - why should BISX Ltd be exempt just because it’s technically a “private company”? It’s licensed by our Securities Commission and operates in the public interest, with its true stakeholders being the thousands of listed company shareholders.
BISX Ltd should go through the discipline of listing itself on the exchange, just as the NYSE is a subsidiary of a public company, Intercontinental Exchange Inc, that under SEC regulation trades as ICE on the NYSE. Without full disclosure, there are no metrics available to measure whether BISX is presently well managed or needs to be reorganised.
ICE is a holding company that owns not only NYSE but several other stock, commodities and futures exchanges. A new paradigm for BISX, and all Caribbean exchanges, would be ownership by a common holding company, allowing them to continue trading under their own names but with the advantages of consolidated finance and information technology, as well as more imaginative management flowing from multi-national sources.
We hope that Government (a BISX shareholder) and our Securities Commission will start thinking along these lines. BISX as presently structured shows limited potential towards our national objective of encouraging economic democracy by spreading share ownership to our famous “little man”.
• Richard Coulson is a retired lawyer and investment banker born in Nassau and from a long line of Bahamians. He is a financial consultant and author of A Corkscrew Life - adventures of a travelling financier.
Comments and responses to email@example.com