With its deferred shares trading below par or issue value, Communities & Workers of Jamaica Co-operative (C&WJ) Credit Union Limited has announced plans to buy back up to 10 per cent of its 450 million deferred shares in issue.

Deferred shares are defined under the Banking Services Act, 2014, as a share (whether or not interest bearing) issued by a mutual society on terms that it shall not be redeemable in any period of less than five years. Online sources such as Rocketlawyer.com list some of the constraints of deferred shares which includes being paid after all other classes of shares (ordinary and preference) plus being last in line of credit on dissolution of the entity.

C&WJ issued the preference shares on May 31, 2018 at an interest rate of 7.35 per cent for five years with a par value of $2.00. After two years, the interest rate is reset every June 15 at 200 basis points (two per cent) plus the Bank of Jamaica’s (BOJ) weighted average six months treasury bill yield. The BOJ’s average yields between January – June was 0.81 – 1.27 per cent.

The share buy-back is set to expire within 21 days of notice to the Jamaica Stock Exchange with the effective date set as November 12. The buy-back will be done on the open market through its stockbrokers with no fixed price set for repurchasing the shares. However, the credit union reserves the right to reject any offer above the ceiling they determine at their discretion.

As of November 12, C&WJ deferred shares closed at $1.60 with a 52-week low on August 5 at $1.47. This means that the preference shares are trading at a 20 per cent discount to par value. Through the buy-back, CW&J would be able to reduce its interest expense and be able to redeem some of this debt at a lower price. Thus, a $200,000 issue of 100,000 shares could be redeemed for $160,000 resulting in $40,000 less being repaid.

C&WJ’s net surplus for the third quarter was cut in half to $44.44 million as the credit union focused on preserving credit quality amid lower lending and higher interest expense from higher member deposits. The overall net surplus for the nine months remains down 52 per cent at $126.95 million as higher credit provision losses dragged down the net interest income. Interest income remains up 2 per cent to $1.51 billion with $12.85 billion in loans at the end of September.

With the BOJ tripling its policy rate to 1.5 per cent, the report stated, “The Bbard and management are confident that the credit union is sufficiently liquid and capitalised to respond to the implications that may arise. Management continues to review the effect of the developments arising from the pandemic, and proactively manages the risks faced by the credit union. The credit union is optimistic that a further reopening of the economy will continue to provide the needed growth in the most affected sectors. In this vein, the board and management have ensured that all the pillars of growth are in place for the credit union to operate successfully within the new paradigm.”

By David Rose