Debt and interestFriday, November 26, 2021
With the Bank of Jamaica (BOJ) increasing its policy rate again to combat rising inflation, many companies with variable rate debt will begin to feel higher interest costs while others will have to pay higher rates for new debt in order to compensate for the increase in interest rates.
Some companies on the Jamaica Stock Exchange (JSE) have listed preference shares which are either variable or fixed-rate, with the majority being the former. JMMB Group Limited (JMMBGL) is the largest issuer of these preference shares with $28.02 billion issued at the end of March 2021. Of the 10 preference shares they have issued, four are variable-rate in Jamaican dollars and another four are fixed rate in United States (US) dollars. JMMBGL's interest expense related to the preference shares has decreased from $1.17 billion at the end of financial year (FY) 2019 (March 31, 2019) to $913.05 million at the end of the FY 2021. This was largely due to the reduction in the BOJ's 180-day weighted average treasury bill yield from 1.86 per cent at the end of 2019 to 0.86 per cent.
In March 2021, JMMBGL issued $9.96 billion in preference shares, which are fixed-rate at 7.15 and 7.35 per cent, but expected to bring an estimated $731.80 million in yearly interest expenses. In January and March 2022, the interest rate on JMMBGL's four variable-rate preference shares will be reset to a fixed base (100 and 150 basis points) plus the most recent BOJ weighted average yield. The BOJ's average yield in July was 1.18 per cent with the November auction seeing an average yield of 3.92 per cent. This came after the BOJ hiked the policy rate at the end of September before raising it again to 2 per cent earlier this month.
If the BOJ's December and February auctions have average yields around 4 or 5 per cent, the rate would be reset to a range of 5 per cent to 6.5 per cent. This would add a possible $317.82 million in additional interest expense with the depreciation of the Jamaican dollar adding to a higher cost on the US dollar preference shares. However, with the group's overall interest income up 20 per cent to $13.15 billion for the six months, the additional interest costs shouldn't significantly weigh down the group's net interest income. Total assets stood at $562.48 billion at the end of September.
Other companies such as CAC 2000 Limited will benefit from the upcoming adjustment to its preference share rate. CAC's preference share rate was fixed at 9.5 per cent for the first four years up to March 2022 with the reset rate to be 3 per cent plus the BOJ's six-month average yield. Community & Workers of Jamaica Co-operative Credit Union Limited had the rate reset in June when the average yield was 1.37 per cent, which was lower than the prior year. Eppley Limited is set to benefit from an extra $9-10 million in lower annual interest expenses after refinancing some of its preference shares in August at lower fixed interest rates. Access Financial Services Limited will be facing higher interest expense related to the variable part of its $1.29 billion corporate bond.
Arrangers at some brokerage firms have noted that some clients are lamenting that they did not refinance existing debt earlier in the year before the BOJ began to raise its policy rates. Most publicly listed companies on the JSE aren't expected to be significantly impacted in the immediate short term with access to borrowing or interest rate costs since most debt is currently fixed rate.
— David Rose