Now what silver lining can be found out of the unrest that plagued the corporate area of Jamaica in recent days?

Jamaican dollar Bonds

An immediate one that springs to mind is the decline in the price of Jamaica’s Government bonds. For example the 9.25 per cent Government of Jamaica Bonds due in October 2025 have recently declined in price from 109.27 (yielding 8.17 per cent) to 98.25 (yielding 9.46 per cent), so if you buy the bond at its current price you will derive an annual yield (or interest) of 9.46 per cent until the bond matures in 2025.

Now there is a reason why there is a decline in price. There is uncertainty as to what the costs of the security operation will be for the government, for certain this was not provided for in the most recent budget presentation. There are also indirect effects as many businesses could not operate fully, which would affect their revenue and the governments subsequent tax receipts. Tourist arrivals may also be affected which may cause the country’s GDP to decline further. All these factors may adversely affect the country’s ability to meet its debt obligations.

So there still is some risk. The current price of the 2025s is still above 80 which it was in the months leading up to the January 2010. But great wealth was never amassed without a certain degree of risk, when Mr. Buffet completed his transaction in September 2008 Goldman Sachs could have still gone bankrupt in fact its stock price traded as low as $50.00 in the months immediately following the transaction. But I bet he is happy with his investment now.

US dollar bonds

Now let’s look at the preference share deal 10per cent a year on US dollars is very attractive, junk bonds typically yield between eight to 12 per cent. The common stock deal is also attractive as the stock is currently trading at $144.00, and Mr. Buffet would be able to buy it at $110.00 resulting in an immediate gain of $34.00 per share or 31per cent subject to transaction costs. Now the only reason why Mr. Buffet was able to negotiate such an attractive deal for his company was that Goldman was perceived to be in trouble because of the financial crisis.

Lessons from many accomplished investors, such as Warren Buffet and Jim Soros, indicate that from many crises there comes opportunity, a silver lining in every cloud so to speak. The challenge is finding that silver lining. In the financial crisis of 2008, where financial stocks were hit hard with losses from investments in securities related to subprime mortgages, with their stock prices suffering, Warren Buffet saw it fit to invest in Goldman Sachs at a time September 2008 when its stock price was at a historical low at about $108.00. The deal allowed Mr. Buffet, through Berkshire Hathway his investment company, to purchase $5B worth of preferred shares in Goldman with a dividend yield of 10per cent, which would net the company $500M a year. He also negotiated a deal where he can buy $5B in common stock at a strike price of $110.00.

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