Jamaica wins gold with global debt swap deal

BY KEITH COLLISTER

Saturday, August 13, 2016

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In a Bloomberg article by Paula Sambo and Ezra Fieser that appeared on Wednesday afternoon entitled "Jamaica Selling Global Dollar Bonds as It Focuses on Growth", Sean Newman, a Jamaican money manager at Atlanta-based Invesco, advised that the government was looking to take advantage of low global interest rates, adding, "We believe the sovereign is going for gold with this transaction. A successful tender will result in a net debt stock reduction, improving debt/GDP ratios, and lower debt service cost."


According to a final term sheet issued by the major banks involved — Citibank and Merrill Lynch — the net amount the Government of Jamaica received was a little over US$846.414 million from the re-opening of Jamaica’s 2039 Eurobond, representing the product of US$743.238 million in the principal value of the bonds issued, multiplied by their issue price of 114.082 per cent (par equals 100). Because the bonds have a coupon (interest rate) of 8.0 per cent and mature in 2039, their yield to maturity is therefore 6.75 per cent.


In our conversation Friday, Newman observed that this yield, effectively the interest rate at which the bonds were issued due to the 14 per cent premium over face value paid to the Government, "is probably the lowest coupon that Jamaica has ever issued at".


He said it could be regarded as the "gold medal" of our bond issues in that "it is a much longer maturity than the 2028 Eurobond (roughly 10-year duration) issued last July as part of the PetroCaribe buy back deal."


Newman believes that this suggests that Jamaica is perceived by the international capital market as "having its house in order", as despite the global search for yield, not everybody can issue at anywhere near this rate.


Indeed, he notes that Jamaica got a much lower interest rate than recent deals from similarly rated countries such as Ghana and Ecuador (the latter was 10.75 per cent for five years), demonstrating that if you don’t have your house in order, "the market is not there for you".


In an interview with
Bloomberg on Thursday, "Jamaica Eyes Escape from Unhappy Cycle of Debt, Low Growth" by Mathew Bristow, Prime Minister Holness confirmed the tender offer was designed to take advantage of favourable market conditions.


"Where opportunities present themselves for us to engineer our finances in such a way that we benefit from existing market conditions, we will do so," Holness said. "The Ministry of Finance has taken an opportunistic position which will result, I believe, in some reduction in our debt obligations as it relates to our interest payments.’’


Jamaica appears to have raised only enough money to retire an equivalent amount of 2017 and 2019 Eurobonds (see my August 10
Business Observer article for more details), paying for them with US$482 million in new bonds and US$364 million in cash (for those who didn’t want the new much longer bonds).


The majority of these bonds are likely to have been owned by Jamaican institutions, suggesting that the take up, while excellent at over 75 per cent, would certainly have been even higher if the institutions had been given more time than just two days to respond to the tender.


Nevertheless, the government now has the opportunity to improve its debt portfolio mix by refinancing the remaining maturities with even cheaper multilateral refinancing, and cheaper (after exchange rate depreciation) local Jamaican dollar debt issuance.


Critically, it should be able to do this without pushing up domestic interest rates, as it has eliminated much of the Government of Jamaica default risk over the next four years, assuming it stays on its current prudent fiscal trajectory and oil prices stay low, as is projected.


Commenting on the deal, Jamaica bond king Gregory Fisher (now at US investment bank Jefferies) estimates that at least US$250 million of the 2039’s have traded since the deal was launched, with prices ranging from a low of 114.75 to a bit over 116, suggesting that a lot of people (presumably the foreign investors typically first in the line in these deals) were happy to take, say, a point and half profit.


However, he believes the selling is probably nearly over, and the bonds are likely to trade up in the coming weeks.


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