The proposed Jamaica Debt Exchange (JDX) is really “an offer we can’t refuse” in that the Jamaican government requires that the exchange succeed as a condition of Jamaica’s request for a combined U.S. $2.4 billion in IMF and other multilateral assistance.

Indeed, this is stated explicitly in a letter from Finance Minister Audley Shaw at the front of the JDX information memorandum, where he asks investors “to support Jamaica with your full commitment to this transaction.”

Referring to the IMF money, Minister Shaw notes that “Without these funds, Jamaica cannot avoid a drastic downward spiral driven by debt” and that “The cost to all citizens in Jamaica would be very large if this transaction and our economic programme fail.”

His key point, clearly aimed at fiduciaries such as pension funds, is that “Therefore we believe it is prudent for all holders of Government of Jamaica domestic bonds to fully support this transaction and, in so doing, positively contribute to the resolution of Jamaica’s economic problem.”

Shaw’s position is further supported by a letter from IMF Managing Director Dominique Strauss – Kahn, contained in the same JDX information memorandum, who states that “providing significant cash relief in terms of reduced interest rates and extension of maturities”, requires a high rate of participation of creditors in the debt exchange, and “is a condition for seeking approval of the IMF’s Executive Board for the Standby Arrangement with Jamaica”. Referring to Jamaica’s economic programme outlined in the letter of intent to the IMF, Strauss – Kahn specifically notes “The support of the financial community, including institutional and retail investors from the private sector, is essential to the success of this program.”

The JDX Information Memorandum states that Jamaica’s borrowing request will not even go before the IMF Executive Board on January 27th “without the aggregate participation of over 90% of eligible Old Notes, including nearly 100% of all Old Notes with less than 2 year remaining to maturity, and nearly 100% participation of all fixed rate Old Notes.”

In a meeting organised by the Financial Services Commission last Wednesday to discuss the proposed JDX with Jamaica’s pension funds, Prime Minister Bruce Golding put the issue starkly when he noted that the foreign capital market was not open to Jamaica, the local market would not be able to continue to fund Jamaica’s current level of fiscal deficit, and the promised multilateral funding was contingent on an IMF programme.

He argued that it was therefore better to take the 12% instrument in the Jamaica debt exchange offer, than to try to hold on to a 24% instrument that could be “worth nothing” in a potential environment of social unrest where “Jamaica could go up in an inferno” if the government had to make major cuts to public services to try to continue to pay the debt, with no guarantee of success.

He revealed that the IMF had originally asked for a haircut on the debt, meaning a reduction in its principal value, and an interest rate of only 8% (rather than the approximately 12% being offered on domestic Jamaican dollar instruments in the exchange) and that more than half of the time spent on the IMF negotiations had been over the issue of the debt exchange, particularly over the past three months. It is noteworthy that tiny Seychelles, in admittedly different circumstances, announced its own successful debt exchange offer last week. This had an 89% participation rate despite much more onerous terms, whereby “50% of the full amount of external commercial debt eligible under the exchange offer will be cancelled”, according to Seychelles Minister of Finance Danny Faure.

The Prime Minister argued that those who voluntarily exchanged their bonds would be put at a disadvantage, or “victimised” as he put it, when compared with those who might refuse, and added that, although he didn’t “want to sound threatening”, free riders could not be tolerated.

He asked the assembled trustees and their representatives to “Bear in mind that the exemption of taxation for Pension Funds is an executive decision”, clearly signalling his intention to tax even pension funds who don’t comply. Indeed, one hears that the planned tax rate on holdouts in such an unwelcome eventuality is a punitive rate of an additional 50% in withholding taxes on interest.

The Prime Minster noted that even after the voluntary exchange ends, the domestic bonds can still be called, and that this “can’t be on the same terms as those who participate voluntarily”. He promised that “those kind of terms will not be available to you”, and that “those who participate will be in a privileged position” clearly signalling, amongst other things, an intention to lower interest rates offered on new interest rates further, thereby posing a significant re-investment risk for those who refuse the offer.

He summarised the position by noting that any fiduciary e.g. trustee who decided to keep the bond would be left with a bond in selective default (according to the three leading international rating agencies), with no market, no liquidity and no support from the Financial Services Commission.

However, the same Standard & Poor’s report which declared the bonds that are part of the debt exchange to be in default (a D rating) also states that the new bond instruments, once issued, will be rated more highly at B- , as, according to their lead Jamaica analyst Mr. Sifon Arevalo. “Overall, the domestic efforts, together with the ongoing multilateral support, should help Jamaica manage its long – standing fiscal and structural problems going forward.”

This statement effectively resolves the concerns raised by the pension industry, as a reasonable trustee should not want to retain the old “defaulted” instruments in the portfolio, as this would likely be construed by fund members as imposing an unacceptable risk on the pension fund.

The Jamaican Chapter of the Caribbean Actuarial Association issued a press release in Sunday’s (January 17th) Business Observer noting that :

“We recognise that time is of the essence and suggest that the regulator should provide comfort to the Trustees and Sponsors stating that the restructuring is in the best interests of the members to limit the liability of the Trustees and Sponsors and so expedite the process.”

Addressing this point, the FSC, at the same Wednesday meeting, released a letter confirming that it “will not take any regulatory action against a trustee solely due to such trustee electing to participate in the JDX” swap into the new instruments.

Finally, for those pension trustees still requiring written investment advice to accept the JDX, they should remember that the fees charged by their investment managers to the pension industry should warrant specific written recommendations on whether to take up the offer, thereby helping trustees to fulfil their fiduciary responsibilities.