The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

THE Government will use its successful $750 million bond issue to “make the most compelling case we can” for Standard & Poor’s (S&P) to restore the Bahamas’ investment grade credit rating.

K P Turnquest, the Deputy Prime Minister, told Tribune Business that the rating agency - which is due to visit the Bahamas before month’s end - will have “a hard time justifying” the continuation of this nation’s’ ‘junk’ status.

He argued that the $2.8 billion in ‘investor indications’, which was almost four times’ the bond offering target, plus recent upward revisions to economic growth numbers provided strong grounds for S&P to upgrade the Bahamas’ rating.

“To me, I think they will have a hard time justifying that strong interest we got against not raising the overall rating,” Mr Turnquest told Tribune Business of S&P. “If we got that kind of interest, our debt must be worth something.

“We’ll certainly be making the most compelling case we can between that and the GDP numbers.”

S&P downgraded the Bahamas’ sovereign creditworthiness to ‘junk’ status at Christmas 2016, citing weaker-than-expected economic growth; a failure to hit fiscal consolidation targets; and the delayed Baha Mar opening as its rationale for doing so.

However, the Minnis administration is clearly hoping that its successful capital raising in the international markets, combined with its the 28 per cent upward revision that took real Bahamian gross domestic product (GDP) to $10.22 billion in 2016, will be enough to sway S&P.

The ‘junk’ downgrade’s impact was felt by the $750 million bond, as the 6 per cent interest rate (price) was some 250 basis points higher than that obtained by the former Christie administration in 2014 - the last time the Government went to the global markets.

The Bahamas obtained a 3.5 per cent interest coupon then because it still had an ‘investment grade’ credit rating, the difference highlighting the damage ‘junk’ status causes through increasing a nation’s debt servicing costs.

Mr Turnquest, meanwhile, told Tribune Business that the $2.8 billion in ‘investor indications’ had generated sufficient demand to push the latest bond’s interest rate down from the originally-forecast 6.25-6.5 per cent.

Acknowledging concerns over the Government’s decision to take on extra foreign currency borrowings, as opposed to seeking funding from the Bahamian capital markets, the Deputy Prime Minister said it had acted based on strategic advice from the Central Bank and other local institutions.

He added that the Minnis administration requires a further $570 million to complete its $1.323 billion funding “envelope”, all of which it intended to place with Bahamian investors.

But, with the $750 million bond’s placement set to take foreign currency debt, as a percentage of the total, from 28 per cent to 30 per cent, Mr Turnquest conceded that “we don’t want to go much higher than that”.

“I think this is just further confirmation that we seem to be on the right path,” Mr Turnquest said of investor response to the $750 million bond. “Both Moody’s and the IMF have made the same general comment that our plan was a reasonable way forward.

“I can tell you that on the roadshow the investor response was overwhelmingly positive. Persons were very interested in learning the policy position of the new government and, to the extent we were able to get interest of $2.8 billion, it is a testament to the fact that the fundamentals of the Bahamas are strong; that the fiscal and growth plan put forward is stable, resulting in more expressions of investor confidence, and we have continued headroom should the need for additional financing arise.”

Mr Turnquest said “some savings” should result from the $750 million bond’s placement with a 6 per cent interest rate. He revealed that the Government’s advisers had initially predicted a coupon of 6.25-6.5 per cent would be required to adequately compensate investors for the risk.

Addressing concerns over why the Government did not turn to the local capital markets first for its financing needs, Mr Turnquest pledged that the ‘balance’ of its $1.323 billion “envelope” would be placed in the Bahamas.

“We’re very sensitive to the liquidity situation,” he said, “and speak to the Central Bank and other investors to make the best possible strategic decision, both for the Government and local investor community.

“We’re still going to have $570 million of financing that needs to be done, in addition to one-off items for various agencies. We believe we’ll be able to absorb quite a bit of that liquidity in the not too distant future. I don’t think it will be an issue once we get around to our operations. It is our view to place all of that locally.”

Observers such as former finance minister, James Smith, have expressed concerns that the decision to pay-out $300 million in short-term Bahamian dollar loans and Treasury Bills with the bond’s US dollars will increase the Bahamas’ foreign currency debt to unwanted levels.

Mr Turnquest conceded that while the Government was “comfortable” with the bond’s impact on the Bahamas’ foreign debt holdings, it was continually monitoring its ratio to the total debt.

“It was about 28 per cent,” he told Tribune Business of the foreign currency debt ratio, “and with this transaction it takes it to, at most, 30 per cent.

“We are constantly monitoring this thing. This is about where we want to be. We certainly don’t want to go much more than that, so we’re comfortable at this level.”