• Move could lead to ‘massive refinancing’
• Deal to focus on debt costs, management
• To give ‘credibility’ in telling Bahamas story
By NEIL HARTNELL
Tribune Business Editor
The Government has hired Rothschild & Co, a major global financial group, to advise on what could become a “massive refinancing” of much of the country’s $11.8bn national debt, it was revealed yesterday.
Multiple well-placed sources, speaking on condition of anonymity because they were not authorised to talk publicly, confirmed to Tribune Business that the Davis administration has engaged a firm with some 3,800 employees spread across 40 countries to help navigate the way forward after Hurricane Dorian and COVID-19 sparked a debt blow-out that worsened already-deepening fiscal woes.
This newspaper was told that Rothschild & Co, in its capacity as the Government’s independent debt adviser, will have multiple tasks and responsibilities. These include “figuring out how to manage” The Bahamas’ international foreign currency debt exposure, both reducing the cost (interest payments) on outstanding bonds and minimising the rates demanded by investors on future issues.
Its executives will also be charged with selling The Bahamas’ post-COVID recovery progress to the international markets amid the belief that this will be more credible coming from Rothschild & Co, which knows the investors and players as a participant itself, than the Government. “They speak to each other and speak the same language,” one contact said of Rothschild and the global markets.
Several sources, meanwhile, said Rothschild & Co may ultimately be tasked with leading a major refinancing of both The Bahamas’ existing and international foreign currency debt. This, they added, might involve making The Bahamas’ domestic debt available to overseas investors by listing it on an international exchange - a move that would enhance liquidity by increasing the debt buyer pool and, potentially, bring yields down.
This, though, would require some nimble relaxation of The Bahamas’ existing exchange control regulations. It would also mean that the price of the Government’s Bahamian dollar denominated debt would no longer be fixed, as it is currently, even though such a move would result in it being acquired by foreign investors paying foreign currency. It is unclear whether the Government or Central Bank would entertain what, in The Bahamas’ context, would be a drastic reform.
“Apparently the Government has retained them as consultants for some sort of massive debt refinancing. They’ve been retained as consultants on the issue,” one source said of Rothschild & Co. Another added: “They have a fantastic plan that they have provided the Government with to refinance the debt and create the narrative to give the creditors a level of confidence to try and get the credit rating back up to scratch.
“It’s going to involve both the domestic debt and foreign currency. The positive thing is that the world will know The Bahamas has a plan of action and that the Government is not just scratching around.” Neither Simon Wilson, the Ministry of Finance’s financial secretary, nor Senator Michael Halkitis, minister of economic affairs, could be reached or responded to Tribune Business inquiries on Rothschild’s hiring before press time last night.
However, Mr Wilson previously told this newspaper that this nation’s bond prices “don’t reflect the confidence investors have in The Bahamas” and “a benchmark issue” may be needed to help address this. Rather than issue new sovereign debt, the Government could seek to consolidate existing bond issues via a collective $1bn-plus refinancing that would help establish “a benchmark yield” for all Bahamas issues traded on the international capital markets.
“Our bonds are held closely by a small group of investors. One of the challenges we have is that we are not on an index, such as the JP Morgan Index. If our bonds were indexed, placed on an index, the potential amount of persons willing to purchase our bonds will increase,” Mr Wilson said at end-April.
“That will have some downward pressure on pricing. What we have to do is find ways to find new investors. For us it means it’s an education process, talking to investors, talking to banks and having strategy. One of the things we need to do is have a benchmark yield. Our offerings are relatively small; $100m, $500m, $600m. Investors like bigger offerings.
“We need to think about having a benchmark issue, $1bn or so. That does not mean new debt. It’s sweeping up smaller debt investors are holding and taking them up. We have to think about that. It enhances liquidity. Our bond pricing doesn’t reflect the confidence investors have in The Bahamas and certainty.
Data from the Frankfurt stock exchange shows that the $600m bond, placed by the Minnis administration at the height of the COVID-19 pandemic in 2020 at an 8.95 percent interest rate, closed last night at a near-36 percent discount to its face value. And the yield on the same issue, whose principal is due to mature for repayment in 2032, is also just shy of 17 percent.
Meanwhile, the $650m bond placed in 2018 at 6.95 percent, and which represented the last major foreign currency issue before the COVID-19 pandemic, is trading at a near 33 percent discount and yield of almost 15 percent. This suggests global investors are heavily discounting The Bahamas’ sovereign debt because of the perceived increased risk associated with it following the pandemic-induced debt surge and multiple credit rating downgrades.
The Bahamas was also reported by Bloomberg News to be among 19 “emerging markets” who may eventually struggle to repay their debts based on current prices (discounts) and yields demanded by investors. It was among ten nations identified as falling into this “distressed territory” since the beginning of 2022.
It is against this backdrop that Rothschild & Co will get to work. The Bahamas’ total foreign currency debt stood at $5.351bn, some 45.2 percent of the total, at end-March 2022, while the debt-to-GDP ratio was over 98 percent. “I think they’ve retained Rothschild & Co to help them figure out how to manage their international debt exposure,” one source said of the Government.
“At the moment, it’s about advising how to potentially reduce the cost of future debt if they have to go to market to raise more as well as help them manage the existing dent in terms of the credit rating so they improve the cost of funds and value of bonds on the international market. They are supposed to help the Government figure out how to minimise the cost, and the best way for how to structure it, with regard to the existing debt and maturities.”
Tribune Business was told that the Government had been talking to potential candidates for the debt advisory role since late 2021. Rothschild & Co was among three to four financial advisory groups that visited The Bahamas to give presentations, and it was selected as the “preferred” bidder - a choice that is also understood to have been approved by the Government-appointed Debt Advisory Committee.
Members of the Debt Advisory Committee have not been publicly disclosed apart from its chairman, former minister of state for finance and ex-Central Bank governor, James Smith. Tribune Business, though, can reveal that other members include well-known business executive Felix Stubbs; RF Bank & Trust president, Michael Anderson; RBC Bahamas head, LaSonya Missick; and executives from financial institutions, Deltec and Pictet.
“I do think the Government is positioning itself so they can approach the international markets, whether the multilaterals or anyone else, so that they have more substance to go and negotiate,” one source said. Another added that Rothschild & Co will also be “advising on the messaging” that The Bahamas delivers to the global capital markets and investors about the pace of its COVID recovery.
“There’s also a perception that The Bahamas’ position is seemingly not fully understood in the international community, the capital markets,” they added. “The rate of a recovery of a tourist destination 40 minutes from Miami is a lot quicker than Barbados, which relies more heavily on UK visitors, and other parts of the Caribbean. The Bahamas is closer to the US and well-known.
“What we take for granted in terms of knowledge of the place, that is not necessarily known by some hedge fund or pension fund. They want to know how you are going to pay me back or my clients. They want to know the chances of recovery for foreign currency inflows.
“They speak to each other; they speak the same language,” the source said of Rothschild and the global capital markets. “We felt they can carry the message with a little more credibility. There is the old Bahamian saying: ‘A fisherman never says his fish are stink’.”