ON Monday afternoon, Jamaica successfully raised US$400 million by reopening an already issued existing Eurobond with a final maturity in 2019. This increased the total size of the amount of 2019 Eurobonds outstanding, which have a coupon of eight per cent, to US$750 million. Because the bond was issued at just above its nominal par value of US$100, at an issue price of US$100.256, Jamaica achieved a yield of only 7.95 per cent, the lowest rate at which Jamaica has ever raised funds on the International Capital Market.

According to international traders, the price of the bond has traded as low as US$100.8 and as high as US$102.25 in volatile post-issue trading, but is not expected to trade below its offer price with strong resistance in the US$100.75 to US$101 area.

Impressively, the lead managers for the transaction — Deutsche Bank Securities Inc and BNP Paribas Securities Inc — reported that the issue was heavily oversubscribed, with more than US$1 billion in orders from several institutional accounts in the US and Europe, as well as some investors from the Latin American and Caribbean region. The offer will refinance a US$400-million Eurobond that was issued in 2001 with a coupon of 11.75 per cent, and which matures in May, with significant interest savings for the government.

According to leading international investment bank JP Morgan’s Caribbean analyst Neeraj Arora, “the timing and terms of the issue were largely in line with market expectations.”

Arora observes that the 7.95 per cent offer yield is 45 basis points (0.45 per cent) higher than last Friday’s close of 7.5 per cent. He notes that as recently as February 4, the 2019s had traded at a dollar price of US$104.8 to yield 7.22 per cent, but came under pressure last week as the government — led by Finance Minister Audley Shaw — embarked on an investor road show amid the overall negative tone in emerging market bond markets.

As a consequence, Oppenheimer’s Dr Carl Ross argues, “the bond was priced very attractively for investors given the recent trading levels of the Jamaican curve. It came at over a four per cent discount in price which, on $400 million in issue size, is a significant sum that was conceded to investors. In our view, the re-opening idea was the only one that would fly in the international markets. By increasing the issue size of the 2019s to $750 million, from $350 million, it significantly increases the perceived liquidity of this issue, making it more attractive for large institutional investors.”

In their press release on the offer, the Jamaican Ministry of Finance carefully observed that the offer “met specific liquidity and structural requirements which now places it in the Emerging Market Bond Index (EMBI), making it more attractive to investors.”

JP Morgan’s Neeraj Arora provides an explanation of this key Ministry of Finance point. He notes that the increase in the size of the 2019s to US$750 million now make them eligible for inclusion in JP Morgan’s benchmark EMBI indices with the 2019s expected to enter the EMBIG and EMBIG-Diversified at the end of February.

He estimates that Jamaica’s weight in the EMBI Global index is likely to increase from 0.13 per cent to 0.31 per cent, which would make it more than some of the other “frontier” credits such as Pakistan, Serbia, Gabon, Ghana, Tunisia, and Georgia. For the EMBI Global Diversified, he estimates Jamaica’s weight will increase to 0.51 per cent from approximately 0.21 per cent currently. This is however only an estimate, as the final weights will be released by JP Morgan’s index team only at monthend. The key point is that institutional investors who manage money benchmarked to the EMBI index will now be required to buy Jamaican paper in their portfolios.

Arora notes that besides the EMBI eligible debt stock of US$1.25 billion (including US$500 million of 2039s), Jamaica has an additional US$2 billion in external bonds outstanding, which are excluded from the EMBI indices as they do not meet the size criteria of US$500 million). Arora calculates Jamaica’s total public debt stock at the end of December stood at approximately US$17.7 billion, or 135 per cent of estimated 2010 GDP, with external debt of US$8.4 billion, or 64 per cent of GDP and domestic debt of US$9.3 billion, or 71 per cent of GDP.

The floating of Monday’s bond follows a series of meetings between Minister Shaw, and institutional investors across the US cities of New York, Los Angeles, and Boston last week, and with European Investors in October 2010. Two thirds of the paper was placed in the US, 21 per cent in Europe and buyers included investment managers with 67 per cent, and hedge funds at 14 per cent.

Mark Croskery, Managing Director of local broker Stocks and Securities, believes that the successful raising and oversubscription of this bond has improved confidence in Jamaica’s debt maturity profile, coming as it has only one year after the Jamaica Debt Exchange.

In his view, the bond also offers a great opportunity for local investors given that domestic interest rates presently range between five to 10 per cent in Jamaican dollars. By buying this bond, investors can get an attractive US dollar yield of between 7.25 per cent to 7.75 per cent on the secondary market.

Dr Carl Ross believes “the market will now likely focus its attention on the upcoming budget debate, where the perception is that further necessary deficit reduction will be exceedingly difficult to design and implement.” In his view, “International investors will continue to be cautious on the Jamaican credit until sustained deficit reduction can be demonstrated.”

The next large sovereign external debt maturity is in July 2012 for ¤200 million.