Investors demanding higher rates
Bank of Jamaica's policy rate has risen from 0.50 in August 2021 to 5.50 per cent as of June 30.

According to a local securities dealer, the number of corporate debt issuances are going down as more issuers are considering the risk of locking in double-digit interest rates which could continue to impact them if rates stabilise and go down.

The Bank of Jamaica's (BOJ's) policy rate has risen from 0.50 in August 2021 to 5.50 per cent as of June 30. This has resulted in higher yields on treasury bills and the central bank issuing higher rates for certificate of deposits as one of the many measures it is taking to curb inflation and deal with liquidity in the system. Another side effect has been rising rates by different financial institutions and higher payments by borrowers with variable rate debt. This has resulted in some borrowers choosing not to refinance debt which results in less instruments being in the market.

"Against the background of the bank's policy adjustment in May 2022 and higher inflation out-turn for April 2022, private money market rates remained generally elevated in May 2022. There was an increase in the appetite for these shorter tenor instruments given the attractiveness of their current returns and the anticipation of increases in the banks' policy rate over ensuing months," noted the BOJ monetary policy committee minutes on head of market operations and analysis department Taffi Bryson's presentation on financial markets.

The BOJ issued an $8.5 billion certificate of deposit (CD) in July 2021 for 30 days which had a one per cent interest rate and a 0.59 per cent yield. The offer received $21.51 billion spread across 63 bids. In July 2022, the BOJ issued a six per cent CD for 30 days which had a six per cent interest rate and a 7.27 per cent yield. The offer received $26.37 billion spread across 147 bids.

However, when the BOJ attempted to issue a two-year CD at a fixed rate of 7.50 per cent in April, it only received $5.93 billion from 126 bids relative to the $15 billion on offer. The average yield for successful bids was 8.17 per cent with the highest bid rate coming in at 8.50 per cent after accounting for the BOJ reserve yield restriction.

In July 2021, the 180-day treasury bill yield was 1.18 per cent while the yield a year later for the same time frame is 7.89 per cent. Barita Investments Limited has moved its repurchase agreement (repo) rates for JMD funds up to $40 million from 3.50 per cent for 30 days to 6.50 per cent so far this year. Mayberry Investments Limited raised its margin loan rate from 12 to 15 per cent while Victoria Mutual Investments Limited has increased the rate on its margin loan by 200 basis points effective September 1. NCB Capital Markets Limited and other brokers have increased their repo rates in recent times.

Different listed companies and their affiliates continue to be impacted by the rising BOJ rates and other general risk-free securities seeing rising yields. This comes as liquidity tightens in the general market with investors demanding higher rates and preferring instruments with shorter terms.

Caribbean Producers Jamaica Limited attempted to refinance US$13-million worth of debt in June at 6.50 per cent for five years through an unsecured corporate note. However, on June 30, the company raised the rate to seven per cent and extended the closing date to July 29. Cherry Hill Development Limited attempted to raise $840 million through a secured corporate note to fund the second phase of the development of a commercial space on five acres of land on Chalmers Avenue in May. The company was recently aiming to raise $600 million at 10.50 per cent for the same expansion with the note to have been issued on July 29 over four years. There was no update by arranger Mayberry Investments Limited up to Tuesday on the success of the offers.

Access Financial Services Limited's $2-billion unsecured, 11 per cent bond raise was to be issued on June 28 but was being advertised with a subscription date of July 18 recently. Even Cornerstone Financial Holding Limited's senior secured fixed rate bond, which was set to be issued on June 28, was pushed down to July 28. The original term sheet date was June 2 with a subscription period for June 13 to 27. The offer was for $6 billion with a minimum subscription of $10 million over three tranches ranging from 8.50 to 9.75 per cent from June 2024 to June 2027. Barita shares at 1.75 times the principal amount and pledged at the Jamaica Central Securities Depository was used as security for the bond. No announcement has been communicated up to press time on Tuesday about the success of the offer.

"The rate is reflective of market interest rates at the time the capital was being raised. However, since we are using JMD to finance USD investments, that is still a very good trade off. The pipeline remains robust across the Caribbean. The higher interest rates go, the more demand increases for flexible capital to finance growth opportunities for middle-market companies [flexibility with amortisation, etc]," said co-founder and chief investment officer of Sygnus Capital Limited Jason Morris about listed company Sygnus Credit Investments Limited (SCI) with rising interest rates.

SCI was in the market to raise $2.3 billion split between tranche one of $1.15 billion and tranche two of $1.15 billion indexed to the United States dollar with a closing date of May 30. The offer could have been upsized to the amount not exceeding 50 per cent of the stated amount. The original term sheet had a cash dividend rate of 6.5 per cent for tranche one and 5.5 per cent for tranche two payable quarterly. The minimum yield for tranche one was 11.5 per cent and nine per cent for tranche two. The offer is a mandatory cumulative convertible preferred shares with conversion to ordinary equity in two years.

The latest term sheet has tranche one paying a cash dividend rate of 8.5 per cent payable quarterly while tranche two has a cash dividend rate of six per cent payable quarterly. Its affiliate Sygnus Real Estate Finance Limited is in the market seeking to raise $480 million with the option to upsize to $720 million through a medium-term secured note facility.

"However, we may consider an APO [additional public offering] sometime within the next two years if we achieve our growth objectives faster than anticipated, that is, we would need to maintain an adequate mix to fund that growth. Bear in mind that the Puerto Rico acquisition was not financed through an equity raise, so we would need to maintain a good mix in the firm's capital structure. As integrations go, it is moving along nicely. Of course, we are in the audit period for SCI so there is a lot of work that is happening on multiple fronts with this process," Morris explained relating to Acrecent Financial Corporation which was acquired for US$21.22 million in February.

Despite the observed difficulty by issuers to raise debt in the market, chief executive officer of Dolla Financial Services Limited Kadeen Mairs believes that the microcredit company won't have difficulty in completing its planned $1-billion bond raise. Mairs pointed out that Dolla generates well over north of 50 per cent in annualised effective interest rates on its loans which gives it ample room to adjust to the market conditions which demands higher rates. The proceeds are to fund the company's growth which it plans to execute across the region with it opening its Portmore location yesterday.

DAVID ROSE

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