FINANCE Minister Audley Shaw launched the Government of Jamaica’s long awaited Debt Exchange offer yesterday morning at the Bank of Jamaica auditorium. The Jamaica Debt exchange asks investors to voluntarily exchange their existing bonds (excluding treasury bills) issued by the Government of Jamaica in the domestic market for new bonds.

The exchange offer is for a little over Jamaican $700 billion in fixed rate, variable rate or US dollar debt issued domestically (the exchange offer does not include our international Eurobonds) before December 31st, 2009. Under the terms of the exchange, the price is fixed with each holder of old bonds receiving new bonds on a par or one for one basis, as well as a cash payment of any accrued and unpaid interest. Although the new bonds have the same principal value, they have lower interest rates and longer maturities.

The approximately 350 different issues of old bonds will be replaced by only 24 new benchmark bonds, 10 fixed rate (all of which are non callable), 9 variable rate, 3 US dollar denominated and two bonds linked to the consumer price index.

The average yield of the new Jamaican dollar bonds will be just over 12%, compared with the current average of around 19%, whilst the new US dollar bonds will yield 7% verses the current average of about 9%. The completion of the exchange is estimated to save the Jamaica government approximately Jamaican $40 billion in annual interest costs.

According to the information memorandum for the offer, the interest rate on the variable rate bonds will be fixed at 11.75% for the first three to twelve months, depending on their maturity (which ranges between 1.5 and 22 years), and when repriced will have a spread of between 1 and 1.5% above the benchmark 30 or 90 day treasury bill.

The fixed rate instruments range between 3 months to 30 years, with an interest rate of between 11 and 13.25%, and are all non callable.

The interest rates on the three new US dollar bonds maturing in 2013, 2014, and 2016 are 6.75%, 7% and 7.25%, and are also all non callable.

Finally, the government is issuing two non callable consumer price index linked bonds, maturing in 12 and 20 years time, with a real rate of return of between 2 and 4.25%. This innovation is designed to meet the needs of pension funds and insurance companies particularly.

The government defined the success of the offer as getting the acceptance of “substantially” 100% of the bond holders, including 100% of the bonds maturing within two years and 100% of the fixed rate bonds.

In his presentation, Finance Minister Audley Shaw noted that the proposed exchange would result in greater liquidity of the debt, lower interest costs and would extend the maturity of the debt. He emphasized that over the last ten years, debt service (capital repayment and interest) had averaged 112% of revenues. This year alone, interest costs represented nearly 65% of tax revenues, and on its present trajectory debt would soon exceed 140% of GDP.

Shaw observed that the offer had been preceded by over nine months of dialogue, and noted particularly the role of JMMB, which in early 2009 had put forward a proposal, which “whilst not identical to the debt exchange” recognised the problem the government faced, and showed their willingness to work in the national interest.

Shaw described this “unparalleled” deal as balancing the demands of the IMF against those of the local financial system, whilst providing protection for domestic bondholders whose debt would no longer be callable.

Minister Shaw made it clear that in order to be fair to all debt holders, there was no room for “free riders” on the grounds of “basic fairness and equity”.

For his part, Prime Minister Bruce Golding promised that politics could no longer triumph over economics, as “Jamaica is on probation but as much as we are resolving to work through and put the country on a brighter path, the potential we have to position Jamaica among those strong fast growing emerging economies, is a potential that remains unrealised”.

The Prime Minister expressed his thanks for the private sector leaders who had publicly expressed their support for the exchange so far. Significantly, at the same event, Bank of Nova Scotia CEO Bruce Bowen, RBTT CEO Minna Israel (also representing the Jamaica Bankers Association as their President) and JMMB CEO Keith Duncan all expressed their support for the exchange.

Included in the information memorandum is a signed letter from the IMF’s Managing Director Dominique Strauss – Kahn committing to investors to send Jamaica’s request for a standby arrangement of $1.25 billion to the IMF Executive Board as soon as “the debt exchange with private creditors had been successfully completed”. Minister Shaw also revealed that the agreement would unlock over US$1 billion in additional support from the other multilaterals over the two year life of the programme, currently estimated at US$600 million from the IDB, US$400 million from the World Bank and US$40 million from the Caribbean Development Bank.

Standard & Poor’s downgrades Jamaica again

Shortly after the official launch of the Debt Exchange programme, rating agency Standard and Poors downgraded Jamaica to “selective default”. All the bonds included in the exchange are now rated ‘D’, meaning that they are regarded as in default under S&P’s methodology (although not under Jamaican law) whilst those bonds not part of the offer, mainly Jamaica’s international Eurobonds, remain at the previous rating of ‘CCC’. Encouragingly, S&P analyst Roberto Sifon Arevalo believes that the domestic efforts, together with the ongoing multilateral support, should help Jamaica manage its long-standing fiscal and structural problems going forward.

“In this context, we expect to assign a ‘B-‘ sovereign credit rating and ‘B-‘ debt ratings to the new bonds upon the completion of the debt restructuring and issuance of the new bonds, which is scheduled for Feb 16, 2010.” In other words, they plan to upgrade Jamaica to a higher rating once the debt exchange is completed.”