• Traditional investors shying away on fiscal crisis fears
• Banker confirms 18-month trend on ‘long-term’ bonds
• Urges ‘bullet payment’ shift; involving more investors
By NEIL HARTNELL
Tribune Business Editor
The government was yesterday urged to “become more creative” in the Bahamian debt markets as traditional purchasers of its bonds increasingly reject long-term paper due to the mounting fiscal crisis.
Gowon Bowe, Fidelity Bank (Bahamas) chief executive, told Tribune Business that fears about the mounting national debt and the Government’s ability to repay creditors long-term meant institutional investors - the likes of banks, pension funds and mutual funds - have been increasingly limiting their exposure to bonds with maturities of ten years or more over the past 18 months.
While some had reached their capacity limits in terms of the amount of government debt that regulations allow them to hold, Mr Bowe said the increasing risk aversion also reflected the fiscal realities and The Bahamas’ repeated creditworthiness downgrades to so-called ‘junk’ status by Moody’s and Standard & Poor’s (S&P).
To improve Bahamian investor appetite for long-term bonds, he urged the government to focus on creating “amortisation securities” - where the principal will be repaid over a series of years - rather than the traditional “bullet payment” issues where payments are backloaded to the final years.
This, Mr Bowe argued, would give investors greater comfort and confidence over the government’s ability to repay its debts, especially in the absence of the comprehensive debt management strategy that he has repeatedly urged it to publish.
While the government has pledged to release such a document after the Public Debt Management Act comes into effect on July 1, it has given no publication timeline. And, besides diversification, Mr Bowe also called on the government to help create greater liquidity in its debt, noting the relatively thin trading that is taking place in the $3.6bn that is already listed on the Bahamas International Securities Exchange (BISX).
Pointing out that investors will be more inclined to acquire the Government’s long-term bonds if they have a better chance of exiting their investments, via selling them in the secondary market, the Fidelity Bank (Bahamas) chief said other companies as well as retail (individual) investors need to be more active participants in the debt markets.
“While it has maybe not been done in a consistent chorus line, that has probably been the case for the past 18 months,” Mr Bowe told this newspaper, confirming the increased institutional investor aversion to long-term government debt.
“That’s because we never had a very liquid retail market, leaving it all to the institutions. Government paper has been concentrated in just a few entities, and there’s only so much capacity those entities have. As we see credit downgrades, as we see the absence of a debt management strategy, credit risk profiles and assessments put risk up.
“As the risk goes up, the willingness to take long-term paper goes down. Are you prepared to take a credit risk in a market that is not very liquid and you will have difficulty exiting for a long period of time? Your risk assessment precludes long-term debt opportunities.”
The likelihood that some institutions are at, or near, capacity on government securities holdings is illustrated by Commonwealth Bank’s recently-released 2020 audited financial statements, which reveal that 99 percent of its total $458m investments are in government bonds or related investments.
Mr Bowe was backed by another capital markets source, speaking on condition of anonymity, who said: “A lot of institutions don’t appear to be taking up long-term government paper any more. Treasury Bills and bonds with maturities of three years and under are the thing. I understand that when the Central Bank did these last couple of offerings, there was very little appetite in the long end.
“They had a lot in the short end. There is a consequence to these downgrades. They also have these new accounting standards where you have to assess expected credit losses for their impact. It will be a good wake-up call. Before, people were just buying coupons; 6 percent, buy a government bond, but not now.”
Mr Bowe confirmed that short-term government bonds are more attractive because investors can still see several years out, and anticipate the likelihood they will be repaid, as he urged the Minnis administration to shift from “bullet payment” debt issues where all the principal is to be repaid in the final few years before maturity.
“They [the Government] may have to be more creative and look at amortisation instruments to demonstrate their ability to repay,” he told Tribune Business. “In the absence of a debt management strategy, it is difficult to determine if they will meet all those payments as they become due.
“Amortisation instruments shorten the tenor and do not preclude them from refinancing. If you take a 15-year instrument and start principal repayments in year sixth, paying one-tenth a year over the next six years, the length of the security becomes about ten years. It shortens the debt exposure and it’s what they need to start doing.”
With the national debt set to break the $10bn mark in the upcoming fiscal year, Mr Bowe warned that if domestic investor appetite for long-term paper does not rebound then the Government would have to seek financing from the deeper international capital markets. This, though, would bring additional challenges in terms of generating the necessary foreign currency earnings to service it.
Some 55 percent of the Government’s $9.417bn direct debt at year-end 2020, or just over $4.7bn, is held domestically, and Mr Bowe added: “It shouldn’t be overblown that financial institutions are shying away from government debt. The fact is that the same players always buying cannot always keep buying it....
“They’ve now listed the Government’s debt on BISX, but there’s very little trading. The Government needs to use its creativity and that of the private sector to encourage retail investors to become more involved so that it’s not left to the institutions. How do we create liquidity by getting corporates to buy it as part of their treasury management?
“It would be wise for the Government to fix these structural deficiencies in the absence of an articulated debt management strategy. They do need the domestic market to play a larger role in debt funding, and if they do not create excitement and enthusiasm around it they will have to turn to the international markets. That will come with its own issues and consequences.”