The Tribune

By The Bahamas

International

Securities Exchange

This article was first published in The Bahamas Investor and thebahamasinvestor.com. Reproduced with permission Etienne Dupuch Jr Publications.

• Introduction

Many emerging domestic capital markets are ignored and neglected by international investors due to their relatively small size and unique features (exchange controls, illiquidity and number of listings).

However, in the Bahamas, there is a different picture that can be drawn, particularly when any international person touches our island nation and becomes aware of the growing and vibrant capital markets within the country, as well as the growth in knowledge and sophistication of the investor base, financial intermediaries and issuers. This article will seek to serve as an introduction to the domestic Bahamian capital markets.

• Recent past performance

2014 and 2015 saw a number of interesting developments in the Bahamian capital market:

• The Government of the Bahamas introduced its first exchange-listed and traded debt in December 2014. These securities, issued as ‘Bahamas Government Stock’ (BGS), were the first dematerialised securities issued by the Government of the Bahamas and, as a result of their dematerialisation, are able to trade in a much more efficient and transparent manner.

During the period December 2014 to December 2015, approximately $200 million in BGS securities were issued. Investors have benefited from greater liquidity due to trading in a centralised meeting place, and the formalised trading nature for fixed-rate Government securities will assist with the development of a yield curve for Bahamian debt securities.

• Many public companies took advantage of historically low rates, as well as high liquidity levels in the Bahamas, to refinance existing bank and corporate debt through the capital markets, with over $300 million being raised in secondary issues over the period 2014-2015. This move allowed many investors to move out of fixed deposit positions into fixed income securities.

• The Government of the Bahamas, through the introduction of Value-Added Tax (VAT) in 2015, made a significant change to the taxation structure of the country. The first year inflows from this initiative, at more than $350 million, helped to reduce the high growth rates in national debt that the country had recently been experiencing.

• Current environment, including the capital markets

After significant fundraising over the last two years, and when viewed purely from this perspective, market observers anticipated that 2016 will see slightly less activity, given that many of the private sector issuers seeking to refinance debt already have. Additionally, the structural reforms undertaken by the Government of the Bahamas should result in lower rates of borrowing in the future compared to the period 2011-2014.

However, this does not mean that there will be no activity now and going into 2017. Approximately $150 million in long-term government debt is coming due in 2016. Much of this will be refinanced and re-issued. Additionally, the reorganisation and recapitalisation of the local electric utility as a new corporate entity, named Bahamas Power and Light, will be financed in part by the issuance of rate reduction bonds, with tranches to be offered both internationally and domestically. Though this type of security has been issued around the world previously, it is a new type of security to the Bahamian marketplace and should add to the increasing diversification of securities available for investment.

Market experts are anticipating one or two initial public offerings (IPOs) shortly. These IPOs would in all likelihood be offered by medium or larger, mature companies that would then seek to list on the main facility of the Bahamas International Securities Exchange (BISX). These would be the first local IPOs since 2012.

BISX is also in the process of developing a junior market listing facility for small and medium-sized companies to offer securities to the public. Tentatively known as the ‘BISX Small Alternative Market’ or ‘BISX SAM’, it is intended to expand the market and open access to a group of entrepreneurs who previously, due to the smaller size of their organisations, faced challenges accessing the capital markets. Companies that initially list on the BISX SAM would be expected to eventually migrate to the main BISX listing facility over a pre-determined period.

Finally, the expansion of Exchange Control Liberalisation measures means that Bahamian investors are able to invest more funds into international investments through vehicles approved for this purpose by the Central Bank of the Bahamas. This Exchange Control Liberalisation programme, via the creation of Bahamian Depository Receipts (BDRs), has resulted from inception in the creation of vehicles that invest in such diverse product offerings as energy, high yield securities and index-linked securities. It is expected that with the expansion of this programme and the integration of new products and services by BISX broker/dealer members, there will be increased offering choices available for investors.

• What challenges are the markets?

The Bahamian economy remains in a fragile condition in late 2016. Events such as Hurricanes Joaquin and Matthew, and the bankruptcy of the Baha Mar resort project, continue to have a negative impact on economic growth. While recent fundraising was made possible due to the high amounts of liquidity in the country’s banking system, new investment and expansion opportunities will require growth and confidence in the country’s economic trajectory to serve as a necessary component.

Additionally, now that many issuers who sought to refinance have already completed those steps, future investment by these issuers will in all likelihood be predicated upon expansion plans. These will undoubtedly be linked to the country’s economic position. Therefore, some of these plans will slow down as the year-end approaches, and as entrepreneurs await to hear the fiscal and economic plans of the political parties that will contest the upcoming 2017 general election.

The Bahamian economy is an integrated economy that is significantly affected by external global economic conditions. Factors such as the current recession in Brazil can have a significant impact on the Bahamian economy in the short to medium-term. The Bahamian economy, as with many smaller economies, is much more closely tied to its domestic capital market than that of larger economies. As a result, further economic deterioration could potentially limit the ability for new rounds of fundraising, as well as dampening expansionary plans.

• Conclusion

The Bahamian capital markets have experienced two very positive years recently, with the BISX All-Share Index increasing by approximately 13 per cent in 2014 and 10 per cent in 2015. Outside of listed companies, fund-raising has been robust. Looking to the future, we believe the following factors would be most likely to contribute to a positive 2016 and 2017 for the Bahamian capital market:

• Continued Small and Medium Entity (SME) support by all domestic stakeholders including BISX, the Government of the Bahamas and the Bahamas Chamber of Commerce.

• Continued fiscal rebalancing that slows the growth of the National debt.

• Formal pension legislation, including the formal adoption of fiduciary obligations for pension fund trustees to ensure that this money is professionally managed.