• Resolve’s recovery of toxic loans ‘trickier’ than thought
• Promissory note rolled over for extra three years at 4%
• Bank chief: Longer maturity ‘no big deal’ given liquidity
By NEIL HARTNELL
Tribune Business Editor
The Government has decided not to complete Bank of the Bahamas’ rescue by injecting $167m in cash to replace a “promissory note” after efforts to recover the latter’s toxic commercial loans proved “trickier” than anticipated.
The BISX-listed institution’s 2022 full-year financial statements, released late last week, reveal the Government has instead agreed to a three-year roll-over or extension to the maturity of the note that had been due for repayment at end-August 2022.
Simon Wilson, the Ministry of Finance’s financial secretary, yesterday told Tribune Business it had proven “much more complex” than thought for Bahamas Resolve to realise and sell the assets that were pledged as collateral to secure Bank of The Bahamas’ previous delinquent commercial loans.
Bahamas Resolve is the special purpose vehicle (SPV), created in 2014, to which Bank of The Bahamas’ toxic commercial credit was transferred to prevent the latter’s collapse and thus facilitate its rescue. To fill the hole created by the transfer, two promissory notes were injected into the bank’s balance sheet, worth $100m and $167m, respectively, in 2014 and 2018.
The latter was due for redemption or payout by the Government at end-August, which would have required the promissory note’s replacement with liquid cash provided by the Bahamian taxpayer - the final step in the bail-out. However, Bank of The Bahamas’ annual financial revealed: “The promissory note with maturity date of August 31, 2022, was extended by three years to August 31, 2025, at 4 percent fixed interest rate with quarterly interest payments.”
Bank of The Bahamas’ balance sheet ascribed a $170.171m value to the promissory note, meaning that the annual interest bill attached will be $6.8m. This sum is supposed to be paid by Bahamas Resolve from selling assets upon which the toxic loans are secured, but if it fails to generate a sufficient sum then the Government - via the Bahamian taxpayer - has to step in and make the payment.
Mr Wilson said the maturity extension will give Bahamas Resolve, in particular, as well as the Government extra time and breathing room to realise more funds from selling-off the loan collateral. Previous projections have suggested that Bahamas Resolve could realise up to $67m from these secured assets, which would substantially reduce the Government and taxpayer’s ultimately liability to Bank of The Bahamas down to around $100m.
“I think it’s really a question for Resolve,” Mr Wilson explained of the roll-over. “Resolve will generate sufficient funds to partially pay down the promissory note. Resolve had a couple of transactions lined up that didn’t close in time. The idea was Resolve would generate money from the sales [of the assets] to pay down the note, and after a period of time the Government would step in and take over the note completely and retire it.
“The assets of Resolve, ones they could have realised, it’s a little more trickier in the short term to realise those assets. It’s much more complex.” Some have become embroiled in legal action, such as the Summerwinds Plaza on Tonique Williams Highway that was pledged as collateral by former PLP cabinet minister, Leslie Miller, and upon which more than $30m is alleged to be owed.
Meanwhile, Mr Wilson said the Government’s 2022-2023 Budget had made no provision to redeem the promissory note and replace it by injecting cash into Bank of The Bahamas. “It was not provided for in the fiscal estimates,” he told Tribune Business. The maturity extension will also benefit the Government’s cash flow, which has been squeezed by the $11bn-plus national debt and associated higher interest payments.
The roll over represents a change from the Government’s last Fiscal Strategy Report, released at end-January 2022, which said a $100m provision had been included in the fiscal plans to repay the Bank of The Bahamas promissory note.
“The outstanding second promissory note of Bahamas Resolve to the Bank of The Bahamas, becomes due in August 2022, and represents a fiscal cost to the Government which has been incorporated in the forecasts. Although Resolve has been able to make this semi-annual payment on the promissory note, which is $5.878m quarterly, it estimates being able to meet at least 40 percent of the $167.7m liability through loan recoveries,” the report said.
“Therefore, the Government has provisioned in the estimates for 2022-2023 an additional outlay of $100m. The Government continues to work with Resolve to establish greater operational transparency through regular financial reporting and publication of asset sales information.” That 40 percent recovery estimate, which was included in the Minnis administration’s last Fiscal Strategy Report, is equivalent to $67m.
Based on Bank of The Bahamas’ 2022 financials, the promissory note has been renewed on terms more favourable to the BISX-listed bank and its shareholders than the taxpayer. The interest rate has been increased from 3.5 percent annually to 4 percent, with payments now quarterly rather than semi-annually. The Government, via the Treasury and National Insurance Board (NIB), owns 82.6 percent of the bank.
Meanwhile, Kenrick Brathwaite, Bank of The Bahamas’ managing director, told Tribune Business that the promissory note’s repayment extension was “not a big deal” for the institution as it has no need for extra cash given the high liquidity levels both itself and the wider commercial banking system face.
“They’ve actually rescheduled the credit as opposed to them paying it out,” he confirmed. “We’ve really rescheduled it and renegotiated it. Liquidity is very good in the system. We don’t need the cash and liquidity for the balance sheet, so it’s not really a big deal for us.’
One financial sector source, speaking on condition of anonymity because they were unauthorised to speak publicly, said of the roll-over: “They’re [the Government] not in a position to redeem that at all. That’s going to be perpetual. We’re wasting our time if we think that’s redeemable. We won’t see that in our lifetime unless one of the international agencies puts pressure on them.”
Bank of The Bahamas’ financials said: “As a part of the transaction, the bank received an irrevocable Letter of Support from the Government. The Letter of Support pledged the Government’s financial support of Resolve to enable it to satisfy its obligations under the promissory note and confirms that, in the event of default by Resolve, the bank can seek to recover outstanding balances from the Government.”