Business

How to replace your maturing GOJ USD bonds

The Sterling Report

BY MARIAN ROSS

Sunday, June 23, 2019

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ON June 24, 2019 the Government of Jamaica will repay the remaining US$88.7 million outstanding on its 2019 bonds.

Investors should have received approximately two-thirds of their original principal already. Today we'll be giving investors some new investment ideas and guidelines for the proceeds of this maturity.

These bonds were issued back in 2008 with a coupon of 8%. Investors should realise that in the current environment, bonds yielding 8% are high risk, speculative investments. For this reason, investors need to be prudent as they seek replacements.

According to Bloomberg data, these bonds have traded at a price as low as 97 and a high of 113. This reflects the ups and downs of the global and local economic environment and underscores an important point for investors: great return comes with great volatility. The Government of Jamaica is currently B+ rated by Fitch and B rated by S&P.

Where are GOJ bond yields now? Global USD GOJ bonds are currently yielding between 2.2% and 6.1% depending on the tenor.

The weighted average yield on B rated bonds (as reflected in the Bloomberg Barclays B rated US High yield index) is currently 6.15%.

HIGH RETURNS AVAILABLE FOR LESS RISK.

High returns available for less risk. It is important that investors realise that it is possible to get higher yields on safer debt with higher credit ratings. For example, there are BB rated (i.e. higher than B) investment options yielding between 6% and 7%. This is a much sweeter spot for investors who are comfortable with non-investment grade debt. Examples include subordinated debt of large corporates in Western Europe and select emerging market corporates.

Can I get 8% on my investments? If so, what kind of risk do I need to take?

In the global marketplace, it is possible to get yields above 8%, but these companies are rated from CCC+ to B-. According to S&P “an obligation rated 'CCC' is currently vulnerable to non-payment and is dependent upon favourable business, financial, and economic conditions for the obligor to meet its financial commitments on the obligation.”

Examples of issuers in this range include, the Government of Ecuador (B-), a large bank in Nigeria (B-), “contingent convertible” notes of the largest micro finance firm in Mexico (B+), a large student loan servicer in the US (BB-). All these entities are facing challenges unique to their business model, industry or economy. Future performance is less certain, and investors receive a higher return to compensate them from these risks.

Investors can check to see that they are getting adequate compensation for the risk by looking at yields of other companies with the same rating or in a similar industry. However, one thing is for sure, an 8% yield or return on global bonds is a very high-risk investment in this market.

You can get 8% in income without high risk. Investors should know that they can replace the 8% income or coupon they earned from the GOJ 8% 2019 bond without taking on such high levels of risk. However, it is likely that the investor will pay a premium for the bond (thereby lowering the effective return below 8%). For example, a large A rated French Corporate has an 8% p.a. note in issue. When the premium on the bond price is taken into account, investors earn an effective yield of 6%. The investor will, however, receive 8% in cash flow each year which will compensate the investor over time for the premium paid at purchase.

Speak with your investment advisor to make sure you are getting the best return for the risk you are comfortable taking.

Marian Ross is an Assistant Vice President of Trading & Investment at Sterling Asset Management. Sterling provides financial advice and instruments in U.S. dollars and other hard currencies to the corporate, individual and institutional investor. Visit our website at www.sterling.com.jm Feedback: If you wish to have Sterling address your investment questions in upcoming articles, e-mail us at: info@sterlingasset.net.jm.


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