By NEIL HARTNELL
Tribune Business Editor
Bank of the Bahamas has thrown the Bahamian capital markets into confusion after informing its preference shareholders that the Government will not be paying their customary year-end dividend on its behalf.
Tribune Business can reveal that Renee Davis, Bank of the Bahamas’ acting managing director, wrote to holders of its class A,B, D and E preference shares on January 19, 2017, to inform them that the normal January payment would not be forthcoming.
However, while many are likely to jump to the conclusion that the struggling BISX-listed bank has defaulted on its obligations to investors, this newspaper understands that - technically - this is not the case.
Capital markets sources explained to Tribune Business that because of the characteristics of Bank of the Bahamas’ outstanding $27.5 million perpetual preference shares, the institution is under “no obligation” to make any dividend payments.
This newspaper was also told that the year-end preference share dividend had not been cancelled, but instead deferred to mid-2017, as part of a wider strategy to ensure Bank of the Bahamas’ capital structure was compliant with new international regulatory standards, called Basle III.
Bank of the Bahamas has already redeemed one preference share class this year, and Tribune Business was told that the remaining $27.5 million have to now be ‘converted’ into securities that will still qualify as Tier One capital under Basle III.
Neither Ms Davis, nor Bank of the Bahamas’ chairman, former auditor-general Richard Demeritte, could be contacted for comment over the weekend.
However, investors and capital market contacts spoken to by Tribune Business slammed the lack of explanation coming from Bank of the Bahamas and the Government over the dividend non-payment.
They said this action, and the resulting information vacuum surrounding it, could have created the impression that the Government was no longer prepared to stand behind, and financially support, the troubled bank that has lost $120 million collectively over the past three years.
The Government, rather than the Bank of the Bahamas, has been paying the semi-annual preference share dividends for the past three years at mid-year and year-end, in a bid to ease some of the latter’s financial strain.
“Due to the Bank’s accumulated deficit position, since July 2014 the Government in its capacity as the major shareholder of the bank agreed to deploy a part of its treasury deposits directly to the paying agent for disbursement to the preference shareholders,” the bank’s 2016 annual financial statements confirmed.
Payments for the 2016 financial year totalled $1.97 million (for 2015, it was $2.2 million), sums that pale against the Government’s purchase of Bank of the Bahamas’ entire recent $40 million rights issue, and ongoing $30 million investment in the institution’s convertible bonds.
This has only added to the confusion as to why the Government would inject such huge sums into Bank of the Bahamas, both to ensure its survival and compliance with regulatory capital requirements, yet decline to make such a ‘minor payment’ to the preference share investors.
Tribune Business understands that Ms Davis’s note to the preference shareholders, who are Bahamian institutions such as pension funds, insurance companies and banks, was effectively just one line informing them that “Bank of the Bahamas will not be paying the December 31 dividend”.
Preference shares are a form of debt, therefore creating an obligation for Bank of the Bahamas to repay investors their principal, as opposed to equity shareholders, where the capital return is discretionary.
Capital markets reaction was swift, one source, speaking on condition of anonymity, said: “I just don’t think they understand it. Doing it just before an election; do they know the repercussions of this? It doesn’t make an awful lot of sense, does it? I don’t think the Government understands this, and what it means from a public perception.”
Another contact, also requesting anonymity, told Tribune Business: “I’m still none the wiser as to what this means.
“The Government has been paying on the bank’s behalf for so many years, and for some reason the Government has determined it needn’t continue to make those payments.”
The source, who had seen the January 19 note, continued: “One assumes the payments were being made to provide some security to Bank of the Bahamas, and to make investors feel more comfortable with the bank.
“I don’t know if the Government feels that because it purchased the rights offering and convertible bonds, it needn’t pay the dividend. $1 million every six months; for the sake of that, why discontinue it? The messaging is loud and the impact small; I’m not sure what people should take from it.”
The source said that without further explanation from both the Government and Bank of the Bahamas, the whole situation “reflects poorly on the credibility of the bank”.
However, they conceded that the non-payment did not represent a default, and that from a legal and technical standpoint Bank of the Bahamas was “fine” to be taking this action.
The source emphasised that the perpetual nature of the preference shares meant there was “no obligation” on the bank’s or the Government’s behalf to pay the semi-annual dividend.
However, they said there was “an understanding” that such payments would be made, and the Bank of the Bahamas situation raised immediate questions as to whether other government entities with outstanding perpetual preference shares would follow suit.
“For all the other entities that have perpetual preference shares, none of them have missed a payment,” the source said.
“Although technically they’re not required, or obligated, to make a payment, there’s an understanding they will.”
Bank of the Bahamas’ 2016 financials revealed that more than 46 per cent of its $510 million loan portfolio is now impaired.
And deposits by the Government and its agencies accounted for 52.8 per cent, or more than half, Bank of the Bahamas’ total deposits at the June 30, 2016, year-end.
This provides further evidence of just how heavily the Government is propping up Bank of the Bahamas, directing its agencies to deposit monies with it, and requiring new public sector hires to open accounts there.
The bank was also non-compliant with four of its five key regulatory capital ratios at end-June 2016, the annual financials revealing that the Central Bank of the Bahamas has made “certain supervisory interventions” with it.
The $40 million rights issue, and ongoing placement of $30 million in convertible bonds, is designed to correct this.