Business

Your JPS bond and you

The Sterling Report

With Eugene Stanley

Sunday, February 17, 2019

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JPS recently announced that it would call (ie repurchase) its 11 per cent 2021 bond at a price of US$101.83 from bondholders on March 5, 2019.

This means that in addition to the interest earned for the period, bondholders will receive their principal of US$101.83 for every US$100 of face value invested.

The bond is widely held by local investors. What will you do with your proceeds? Today we look at the history of the bond and some alternative options in the financial markets.

Almost eight years ago, the Jamaica Public Service Company (JPS) issued a 10-year bond to raise approximately US$180 million to fund its operations. The bond had an attractive coupon rate of 11 per cent (payable semi-annually and without the deduction of withholding taxes) and a maturity date of July 6, 2021.

JPS had the option to call or repay the bond at any time after July 7, 2016 provided that the company gave bond holders notice of at least 30 days. JPS largely resisted the temptation to call and refinance the bond during the low interest rate environment of the last few years.

However, JPS announced their decision to repay the expensive 11 per cent bond on March 5, 2019 and replace it with a lower coupon bond, thereby reducing its debt servicing costs.

What should you do with your call proceeds?

There are more options than you may realise.

It is possible for individual investors to get attractive returns on USD-denominated bonds with relatively short durations and very reasonable credit quality. Currently, given the low JMD interest rate environment and the absence of attractive alternatives, you may find better-priced USD options. Institutional investors (such as pension funds or life insurance companies) will tend to invest in longer dated securities than individual investors.

What are the options available?

Some of the attractive USD bonds available have high coupon rates with comparatively higher credit quality than some of the local offerings (ie lower risk). As an example, a Mexican company rated BB+ (ie superior to Jamaica's B+ rating by Fitch) recently issued a 10-year USD bond at a coupon rate in excess of nine per cent with a call period of four years. Unfortunately, Jamaican offerings cannot have a rating which exceeds Jamaica's B+ rating by Fitch, and as a result they are considered to be high-risk investments.

Additionally, there are also investment grade rated bonds (ie rated at least BBB- by S&P and Fitch and Baa3 by Moody's) offering yields in excess of seven per cent and durations under 10 years. One of the largest UK banks, for instance, has an investment grade rated bond with a coupon of 12 per cent, a yield of 7.4 per cent and is expected to be called in December 2024.

In addition, one of the largest US telecommunications companies has an investment grade bond yielding in excess of seven per cent, for further context. These bonds are very large in issue size and held by a wide cross section of investors. This makes these bonds highly liquid and tradable (easy to sell when you want to exit).

Interest payments on international bonds are also made without the deduction of withholding taxes which give investors more income to reinvest until their income tax obligations become due and payable.

Investors should seek responses to the following questions when considering investment options: Do I qualify for this bond? Am I being sufficiently compensated for the credit risk I'm taking? Can I get better credit quality bonds at the same or better yield? Will I be able to exit my holdings with reasonable ease if I choose to so do? Am I only interested in local opportunities or am I looking to get the best return wherever available, for the type of risk I'm willing to take?

Eugene Stanley is the VP, Fixed Income & Foreign Exchange at Sterling Asset Management. Sterling provides financial advice and instruments in US 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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