'JDX2' seeks five-point cut in interest rates

Government says it can’t get IMF deal without 100% take-up

BY CAMILO THAME Business Co-ordinator thamec@jamaicaobserver.com

Tuesday, February 12, 2013

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THE Government is asking holders of public debt to take up to a five percentage point reduction on interest rates.

It is also asking them to accept a deferral on the repayment of their principal for at least another three years.

What's more, the finance ministry is saying that it won't be able to secure a deal with the International Monetary Fund (IMF) without full participation.

"Without reaching this target we will not meet cost-saving targets required by the IMF," it said in a Q&A pamphlet. "We expect virtually all holders to accept the transaction, based upon the community interest in achieving the shared benefits. We will actively address non-participation if there is any."

The sequel to the Jamaica Debt Exchange (JDX) of 2010 — called the National Debt Exchange (NDX) — aims to lower the annual finance costs by $17 billion by shaving an average of two percentage points off interest rates on $860 billion of government's domestic debt.

Importantly, if the programme is successful, the Government won't have to fork out some $90 billion in cash, including US$290 million in debt, which becomes due for repayment in nine days.

The NDX, which opens today and runs until next Thursday, is seeking to swap 27 of the 30 JDX benchmark notes for new NDX notes, leaving $38 billion of debt untouched, apparently because they already carry coupon rates of seven to 8.5 per cent.

The reduction in interest rates on fixed rate notes start at five percentage points for bonds due within the next 12 months, or about $113 billion of the debt, while the rate cut declines to one percentage point for longer maturities.

But smaller interest rate cuts require longer tenors. For instance, the offer requires that $38 billion in notes, which become due next year, take a 4.5 percentage point cut in rate, while adding three more years to its maturity date.

On the other hand, $45 billion in bonds that mature in 2019 would only take a 1.75 percentage point cut in the rate (from 12.75 per cent to 11 per cent), but would be swapped for a note that matures in 2024.

Variable rate notes, US dollar denominated bonds and special consumer price index bonds, which combined were valued at $546 billion at the beginning of 2013, will see interest rates shaved by 0.75 - 2.0 percentage.

While the Government needs full participation in the programme, it is offering a special retail note to holders of $25 million or less in government paper, or US$200,000 or less of US dollar notes, which becomes due for repayment by 2014.

They may opt ot take a new fixed rate note that matures in 2014, but the notes carry interest rates that are 0.25 - 0.5 percentage points lower than the new notes, which will expire in 2016.

For financial sector firms that might face problems after taking a significant drop in net interest income, Bank of Jamaica Governor Brian Wynter said that the Financial System Support Fund (FSSF) will be revived in order to ensure sector stability.

"Our technical team has reviewed the debt exchange offer in detail and has run various stress tests that assure us that the temporary impact on financial institutions' profitability and capital adequacy will be manageable," said Wynter.

The FSSF, which was established with US$650 million funding in 2010 after the JDX, will be administered by the Financial Regulatory Council, and the form of support that will be provided will be repo-based funding.

Even though the NDX claims to avoid any haircuts to principal amounts owed, a special mechanism, called a fixed rate accreting note (FRAN), aims to lower the amount owed to certain state-owned agencies by 20 per cent.

The FRANs, which carry interest rates of 10 per cent and which mature in 2028, would gradually see the principal amount climb back to 100 per cent — starting in 2015 — but they would immediately lower the Government's debt by billions of dollars.

It is not clear how much of the debt can be converted to FRANs, but public sector bodies, including theNational Insurance Fund, owned 19 per cent of the domestic debt.

The Bank of Jamaica (BOJ), which by itself holds 10 per cent of local government debt, said that it will be "participating in the exchange with 100 per cent of its holdings".

Apart from lowering interest payments and the nominal debt amount owed (at least in the first instance), the NDX would also dramatically ease domestic borrowing requirements for at least a year.

Instead of having to pay back $407 billion by 2016, the Government will only be required to fork out $102 billion over that period.

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