By NEIL HARTNELL
Tribune Business Editor
The Bahamas is “not doing anything to shore up” the confidence of investors who are “rightly concerned” about the country’s economic and fiscal prospects, the Opposition’s finance spokesman asserted yesterday.
Kwasi Thompson, ex-minister of state for finance in the Minnis administration, told Tribune Business that “no one wants us to go down that road” of requiring International Monetary Fund (IMF) assistance after capital markets investors quoted in an online news article suggested some bond holders would prefer such an outcome (see other article on Page 1B).
The piece by Global Capital, an online news outlet that has covered global financial markets for three decades, also quoted investors as suggesting that last week’s dual-tranche $385m Bahamas bond issue was overly-complicated in its structure despite being partially underwritten by a $200m Inter-American Development Bank (IDB) guarantee.
While the issue was ultimately “oversubscribed”, and hailed by the Government as a sign of investor confidence in its economic and fiscal projections and post-COVID turnaround strategy, Mr Thompson said the views raised in the Global Capital piece “confirm a lot of the concerns and fears already raised by the Opposition”.
“If the revenue projections are unrealistic as to their terms and cannot be met, that puts the entire deficit in danger,” he argued. “Again, I think investors are troubled and investors are concerned, and rightly so. This Budget does not do anything to shore up the concerns of investors.
“I think what is required is for the Government to stick to their targets that were laid out and they committed to in their Fiscal Strategy Report, which they have failed to do. That is the purpose of the Fiscal Strategy Report, the laying out of fiscal targets, and by law it requires the laying out of fiscal targets, and they have failed to adhere to those targets. I believe that is what has caused major concern.”
Some analysts and investors suggested bond market players wanted The Bahamas to go into an IMF assistance programme, which would serve as a “policy anchor” for fiscal consolidation, but the Davis administration was not surprisingly resistant to this because of the dire economic and social consequences that will result from new and/or increased taxes, reduced spending and public sector downsizing.
“We obviously do not want to go down that road, and the Government has to adhere to those principals in the Fiscal Responsibility Act,” Mr Thompson said, referring to the IMF. “No one wants us to go down that road.” Many would argue, though, that successive PLP and FNM administrations are equally responsible for the fiscal crisis that The Bahamas now faces.
Meanwhile, Gowon Bowe, Fidelity Bank (Bahamas) chief executive, said he took the article’s criticisms of The Bahamas’ $385m bond issue “with a grain of salt” given that they seemed to be coming from disgruntled investors unhappy about their inability to participate in the Series A portion of the offering.
This was the tranche underwritten by the IDB, and it was revealed that the entire $135m made available had been purchased by Goldman Sachs. The global investment banking giant was also the $385m bond’s sole global co-ordinator and bookrunner for the Series A tranche, and served as joint bookrunner for the unsecured $250m Series B portion with Oppenheimer & Company.
The $135m Series A proceeds will also be used to refinance, and payout, the $206.5m “repurchase” deal that the Government entered into with Goldman Sachs some two months ago in March 2022. Effectively, what the $385m bond has enabled Goldman Sachs to do is swap short-term Bahamas government debt with a longer-term variety, with the latter now underwritten by the $200m IDB guarantee and thus providing it with excellent investment security.
Mr Bowe said other potential and existing investors thus felt the bond’s benefits were weighted towards Goldman Sachs. He added that he had spoken to several persons who attended the “roadshows” and presentations where the $385m bond was marketed to investors, and said: “They felt it was quite positive, but very much led by the benefits to Goldman Sachs.”
The $385m bond’s two-tranche structure has been questioned, with some querying why The Bahamas did not follow Ghana’s example by leveraging the World Bank guarantee it obtained through a single bond issue. The IDB guarantee this nation obtained, though, was critical to ensuring the Government can still access US dollar financing in the international markets at reasonable costs to the taxpayer at a time when conditions are moving against The Bahamas.
With the Federal Reserve set to raise interest rates by up to three-quarters of a percentage point this week, according to analysts, as the battle with inflation intensifies, the emerging market spreads - the difference between US interest rates and those countries such as The Bahamas can obtain on US dollar financing - will also increase.
This will mean this country has to pay more for foreign currency debt should it have to go to market again, with debt servicing (interest costs) to be paid by the Bahamian taxpayer likely heading into double digit territory through a conventional bond issue.
The Ministry of Finance, in a statement earlier this week, said the $200m guarantee provided by the IDB had kept the “all-in” yield or interest cost associated with the $385m two-bond series “substantially inside The Bahamas’ secondary market curve”.
The IDB guarantee secures the repayment of principal and interest for the $135m Series A bond, which carries a 3.85 percent interest coupon. The unsecured $250m Series B tranche, which carries a higher 9 percent interest rate to reflect the increased risk, will only benefit from the guarantee if “a residual portion equal to or greater than $2m” is left once the Series A notes have been repaid.
The two bond tranches carry different maturities, with the unsecured Series B set for principal repayment in June 2029, and the guaranteed (underwritten) $135m due to be redeemed seven years later in June 2036. The offering shows how eager the Government is to minimise debt servicing (interest) costs in a tough capital markets climate.
Noting that market conditions post-COVID have moved against The Bahamas, the Ministry of Finance said: “In recent times, market conditions have not been favourable for emerging market countries like The Bahamas. The combination of increasing US Treasury rates, widening emerging market credit spreads, uncertainty regarding the outlook of inflation globally, rising commodity prices, among other considerations, have materially reduced market access for non-investment grade rated issuers globally.”
“The [IDB] guarantee, alongside the international market’s recognition of the ongoing recovery in the Bahamian economy and the Commonwealth’s commitment to responsible fiscal and debt management strategies, helped to catalyse investor demand for the dual-tranche offering, which was driven primarily by investors located in the US and continental Europe.”