Retail investors and financial institutions that used to enjoy the previous higher rates now have to look elsewhere to replace the return that they have lost. With the Jamaica Debt Exchange (the JDX) having become a fairly recent historical event, it seems to have interest rates heading in the intended direction, that is lower. Prior to the JDX the Government was borrowing funds at interest rates in excess of 20 per cent, currently they are borrowing funds at rates that range between nine to 11 per cent.

Strategies to increase returns

Now in the case of financial institutions they will now be looking more at loans to replace the shortfall, as more and more institutions look towards this area the competition to offer loans heats up, which results in lower interest rates as can be seen with many of the Major banks lowering their base lending rates and offering incentives, particularly in automobile loans.

But what is the retail investor to do? The retail investor cannot offer loans to the public directly so that avenue is out. They will have to look at buying commercial paper. Commercial paper is short term (usually less than a year) debt that companies offer to investors or lenders, in order to finance business operations (capital projects etc.). Now the interest rates that is offered on this paper tends to be greater than comparable government debt and with good reason, as companies tend to have a greater risk associated with them than the governments of the countries within which they operate.

Commercial paper offers some protection

The size of the difference in the interest rates is often a function of the risk of the company. But investors may ask how they gauge the risk of a company particularly if it is a private company and there are no financial statements available to the public.

Regulatory requirements dictate that if a company is making a public offering of commercial paper it has to file with the Financial Services Commission and make available to the public an Information Memorandum.

The Information Memorandum contains in it all the information that an investor would need to make an informed decision about whether to invest in a commercial paper or not. Key points that are included are: a legal opinion on the company’s ability to borrow, disclosure of the financial statements for the past five years, information on any pending litigation, list of key management within the organization, as well as many other points. Should the investor choose to invest he will also be able to updated periodic information on the activities of the company that may affect its ability to meet its debt obligations. So Commercial paper should be a viable alternative for fixed income investors who don’t mind taking a bit more risk to bet a better return.

Bob Russell is assistant vice president, structured finance at Mayberry Investments Limited. He can be contacted at bob.russell@mayberryinv.com