Caribbean debt recap
This week, we at Bourse discuss recent developments in the Caribbean US Dollar debt space. We take a look at the regional debt markets in the Caribbean, mainly Trinidad and Tobago, Barbados and Jamaica and highlight potential opportunities for the fixed income investor.
Trinidad and Tobago
The Government of Trinidad and Tobago (GOTT) announced and issued a 4.375 per cent GOTT 2024 US Dollar denominated bond last week. The original issue size was set to be US$500 million, which was subsequently increased to US$550 million to accommodate investor appetite. The bond was issued at par value, $100 per $100 face value. Traded price indications as at Friday 13th December were $102.41, with a yield to maturity of 4.09 per cent.
This GOTT 4.375 per cent 2024 issuance has been the first USD denominated issue for the sovereign since its US$150 million 5.875 per cent GOTT 2027 bonds issued in 2007. The Government’s US$550 million was substantially oversubscribed, with unofficial estimates suggesting an oversubscription of at least 5½ times. The high demand for our country’s debt establishes that international investors hold a favourable view of the T&T issue. In addition, there is a relatively small supply of debt available to investors.
Does the GOTT 2024 offer value to the investor?
As it can be seen from Exhibit 1, the USD GOTT bond with a yield to maturity of 4.09 per cent provides higher returns than existing GOTT USD denominated sovereign bonds. In the US, 10 year treasury bonds are currently yielding around 2.87 per cent, with the new GOTT issue yielding about 120 basis points more. US Treasuries do, however, have a higher credit rating than GOTT bonds. Compared to an A rated Composite USD curve, the new GOTT bond was priced broadly in line with the corresponding 10 year point. When compared to the TTD government bond yield curve, however, we find that the new USD GOTT issue provides a 150 basis point yield pick up over 10 year TTD government bonds which yield around 2.59 per cent. This means that investors who are able to access US$ can benefit from converting their currency in order to achieve higher returns.
As part of the government’s strategy for financing its budget deficit for 2013-2014, Barbados had been seeking to raise net US $150-200 million via international capital markets. The proposed approach was a tender offer to repurchase US$300m of existing debt, with a subsequent issuance of a new US$500m bond. This would have qualified the Barbados bond to be part of the Emerging Market Bond Index (EMBI), and access potentially more favourable financing costs. Ultimately, both proposed actions were met with lukewarm investor response, leading to an indefinite postponement of the transactions.
As a result, Barbados’ long-term rating has been lowered by Standard & Poor’s Rating Agency to ‘BB-’ from ‘BB+. The country ratings outlook remains on ‘Negative’ indicating a ‘better than one-in-three chance of a downgrade if investment and growth prospects fail to strengthen and external and fiscal pressures continue to complicate financing’. A report from the IMF on Barbados casts further uncertainty over the short term prospects of the island, citing a combination of weak exports, poor tourism figures, public debt increases and questionable fiscal policies will weigh on the nation. In an attempt to kick start recovery, Barbados Finance Minister Chris Sinckler announced the termination of 3,000 public workers over the first quarter of 2014.
In an attempt to rectify its burgeoning debt levels, Jamaica executed a programme of debt exchanges with the first occurring in 2010 and the other occurring in February 2013. The most recent iteration involved the government asking bondholders to exchange JA$860 billion (US$9.1 billion) of higher interest Jamaican dollar debt for lower yielding bonds. Once again, the exchange only affected domestically held debt and did not reduce the principal. Jamaica has so far passed the assessments made by the IMF which has resulted in an improvement of its credit rating by S&P to B- from CCC+.
In addition to the household names of Trinidad, Barbados and Jamaica, several other Caribbean nations provide the fixed income investor with a more diverse regional menu of bonds from which to build their portfolio. Some other popular Caribbean issuers include Aruba, The Bahamas and Bermuda.
For more information on these and other fixed income investment themes, give us a call at 628-9100, e-mail us at email@example.com or visit us at any one of our three offices located in Port of Spain, Chaguanas and San Fernando. Investors can also visit our website at www.bourseinvestment.com or Bourse Securities Limited Facebook page.