Clico bond update
Last week, Finance Minister Larry Howai promised that by year's end there would be a resolution to the Government's Enhanced Payoff Regime geared towards CLICO/BAT policyholders. And, with the deadline for acceptance less than two weeks away, our analysis has found that there are many who have yet to accept the Government's offer. Those who have already accepted the offer and currently hold Government of the Republic of Trinidad and Tobago Zero Coupon Bonds (GORTT ZCBs) would have been pleased to hear the Minister state that the process for accepting the CLICO Investment Trust or NEL 2 shares should start by around the middle of October. In light of these developments, we continue our coverage on the status of the Government's Payout Regime and, in particular the NEL 2.
Allocations and Transfers Update
The Central Bank of Trinidad and Tobago (CBTT) reported that as at September 11th 2012, allocation letters with an aggregate face value of $8.04 billion of 1-20 year GORTT ZCBs were issued to bondholders. This represents approximately 76.57 per cent of the proposed $10.5 billion payoff. Out of those allocations, $4.0 billion was traded on the secondary market within the 1-10 year range. These figures suggest that roughly 76.19 per cent of 1-10 year bondholders have opted to encash their 1-10 bonds. These 1-10 year bonds were typically traded as 1-10 year or 1-5 year blocks. And, with the first maturity coming due on 30th November 2012, some have opted to trade years 2-5 and 2-10. It should be noted these figures do not account for "double counting" arising from the inclusion of subsequent third party trades and transfers.
Exhibit 1 shows that the rate of acceptance and trading has slowed in the last 3 months when compared to the first 6 months of trading. However, it is our understanding that holders can still opt to accept the Government's offer if they have not already done so. Holders of the Core Fund Series have until September 30th to accept the offer. Thus, we expect to see a pick-up in acceptance and trading as this date approaches since approximately 23.4 per cent have not yet accepted.
From what we have seen thus far, an insignificant number of CLICO bondholders have traded in their ZCBs with maturities within the 11-20 year range. The majority of the bondholders have chosen to hold on to these bonds in anticipation of the NEL 2. Based on our calculations, approximately 38.5 per cent ($4.04 billion) of the total $10.5 billion or 50.25 per cent of the $8.04 billion allocated have not yet cashed in their 1-10 year bonds. Please be advised that the figures presented are estimates based on feedback received. See Exhibit 2.
In our latest poll, unofficial data indicates the pricing being offered to bond holders from the various financial institutions range from 83 cents and upwards for bonds maturing in the 1-10 year range. However, the pricing is dependent on the aggregate value of bonds to be traded.
NEL 2 Coming Soon
The NEL 2 entity is expected to act as an investment vehicle with CLICO's shareholdings in Republic Bank Ltd (RBL) as its primary asset. Based on RBL's shares outstanding, CLICO's holdings account for approximately 32 per cent. NEL 2 is to be valued at approximately half of the total CLICO liability outstanding. This amounts to $5.25 billion which will be backed by the 51.9 million RBL shares and other assets.
By going the NEL 2 route, investors are expected to receive the face value of their 11-20 year bonds which can then be liquidated. Policyholders will find greater value in exchanging their 11 -20 year ZCB for shares in the NEL 2 as opposed to cashing in their bonds now. However, bondholders still have the option of holding their GORTT ZCB to maturity. When details are finalized, bondholders will be informed of the process of the NEL 2 trading.
With the latest update by the Minister on the commencement of the NEL 2 acceptance process, bondholders can soon exchange their 11 -20 year ZCBs for shares on a dollar for dollar basis. This option may prove to be more beneficial since the bondholder may get significantly more upon liquidation as compared to the current discounted value that will be received if encashed now.
If shareholders choose to hold on to their shares, they will have direct ownership in the NEL 2 and indirect ownership in RBL. As such, these shareholders will be subject to the behavior of the price of the RBL shares on the market. Given the rate at which the 1- 10 year ZCBs were encashed, it may be safe to assume that the acceptance and encashment of the NEL 2 shares may follow a similar pattern. Thus, such massive supply pressures, without corresponding demand, may result in downward pressure on the price of the NEL 2.
Bondholders who are eager to get cash in hand can still liquidate their 1 -10 year ZCBs. We reiterate the need to shop around to get best value. For those who do not have immediate cash needs, there are alternative quality investment opportunities available in both the local and international space, which can provide investors with attractive returns in the short to medium term. Bondholders are advised to consider the various investment opportunities available to them and after discussion with a qualified investment advisor, select that which is suited to their investment needs. As more information comes to light, Bourse will continue to provide investors with the necessary updates to facilitate informed decision-making.