Phillips confirms PetroCaribe debt buy-back saves Jamaica US$300 million

Phillips confirms PetroCaribe debt buy-back saves Jamaica US$300 million

Wednesday, August 12, 2015

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ON Monday, Finance Minister Peter Phillips formally confirmed that three-quarters of the US$2 billion recently raised from the international capital markets, or US$1.5 billion, was used to purchase US$3.25 billion of debt owed by the PetroCaribe Development Fund to PDVSA Petróleo SA, Venezuela's state-owned oil company.

This represented a cost of roughly US$0.46 per US dollar of debt, with the price paid being calculated on the net present value of the debt outstanding at December 2014, or virtually all the debt then outstanding. The minister emphasised that the PetroCaribe agreement continues however.

As a consequence, the minister of finance noted, "Our debt service will be lower by just under US$300 million over the life of the transaction. This applies to the total debt service [that is, principal and interest] to be repaid in relation to the funds raised in the international capital market to purchase the PetroCaribe debt when compared with the total debt service on the full PetroCaribe debt.

Equally important, the money used to fund the purchase of the PetroCaribe debt requires that for the first 10 years we only make interest payments — there are no principal repayments."

This statement appears to mean that — on a net present value basis (meaning discounted for the time value of money, or the reverse of compound interest e.g. $110 received in one year’s time at 10 per cent interest is worth $100 dollars today) — the total debt service to be repaid for the funds raised in the international capital market to purchase the PetroCaribe debt, compared with the total debt service on the full PetroCaribe debt, is just under US$300 million less.

On a non-discounted basis, meaning not taking into account the time value of money, sources advise the savings are projected at US$525 million. Phillips advised the transaction would lower the debt-to-GDP ratio by approximately 10 per cent, or a J$164 billion reduction in Jamaica's nominal public debt stock, from J$2,147 billion to J$1,983 billion dollars.

He also confirmed that, as a result of purchasing the debt, the PetroCaribe Development Fund is now obliged to pay the central government, instead of PDVSA Petróleo SA, for the full amount of the debt. In short, responding to criticisms that the PetroCaribe debt buy-back had "mortgaged the future of children not yet born", Minister Phillips advised instead that the debt buyback would not require higher taxes.

Financing needs met The medium-term debt management strategy laid in the Parliament during the Budget Debate required J$128.9 billion in borrowing from both domestic and external sources.

The other purpose for which the money was raised was to "ensure that the 2015/2016 budget is now fully funded and insulated from any adverse market conditions which may develop.

" The additional US$500 million raised "for budgetary purposes", the minister emphasised, "ensures that the sixty-two billion dollars J$62.0 billion of National Debt Exchange payments due in February 2016 will be repaid."

He noted that the issue size far eclipsed Jamaica's record bond issue last year of US$800 million, with investor interest exceeding US$4 billion, or more than twice what we ended up accepting. Particularly noteworthy, he said, was that the market was willing to "go long" on Jamaica, with US$650 million being placed for 30 years.

"This strong interest by the international capital market demonstrates investors' confidence in Jamaica and specifically in the Economic Reform Programme and the various initiatives this Administration has already implemented and plans to implement in the future.

Raising long dated securities creates not only debt amortization flexibility, but also the ability to support investments in GDP growth promotion." The remaining US$1.35 billion, representing a second tranche, has a final maturity of just under 13 years, and matures in 2028.

The funds were raised at the lowest interest rates "Jamaica has ever been able to borrow, which signifies investor confidence and an improvement in our credit profile, which I expect will continue", Phillips added.

"The timing of the transaction allowed Jamaica to minimise any impact on funding costs which may arise due to uncertainty linked to the forecasted interest rate increases by the United States Federal Reserve later this year".

Addressing the issue of whether cheaper multilateral financing would have been available for the transaction, Phillips noted that "we have been having discussions with both multilateral banks for more than a year regarding our interest in securing additional financing from them".

However, he noted, both the World Bank and the Inter- American Development Bank have already committed US$1.1 billion over four years to Jamaica (an average of US$275 million per annum), and "this single transaction represents more than approximately one and a half times their commitment over four years", implying that the money was simply not available.

In addition, he stated, "We should bear in mind that the window for the completion of the transaction was not available forever. It had to be completed within a specified time. Negotiations with the multilaterals would have required an extended period of time."

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