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Post-NDX update

Today we at Bourse would be covering a brief review of the Jamaican cross listed stocks and non-cross listed stocks Post-NDX.

The Jamaican economy has been battling with heavy domestic debt for many years now. Jamaica's debt is 140 per cent of its Gross Domestic Product (GDP), one of the worst margins in the world. As a result, the Government of Jamaica (GOJ) once again turned to the International Monetary Fund (IMF) for assistance. However, a prerequisite for the IMF loan of US$750M is the completion of a planned debt swap, requiring 100 per cent participation.

The National Debt Exchange Offer (NDX) was launched February 12th, 2013 in an attempt to reduce the Jamaican Government's annual finance costs by J$17B, shaving an average of two percentage points off interest rates on J$860B of the country's domestic debt. Following the launch, Moody's Investor Services downgraded Jamaica's sovereign foreign currency rating to Caa3, stating Jamaica's debt burden remains unchanged since the announced restructuring did not impose any principal haircuts. Standard and Poor's (S&P) also cut Jamaica's rating to Selective Default (SD).

At the end of the first deadline, approximately 97 per cent of creditors accepted the offer. After an extended deadline, this increased to approximately 99 per cent. Following the completion of the NDX, Standard & Poor's raised Jamaica's credit rating to CCC+ from default.

Despite this participation rate, there is a reported J$10B shortfall following the close of the NDX. The Jamaican Gleaner has reported that the GOJ has since approached financial institutions for an additional exchange of bonds (referred to as the NDX2) to fill the gap. There is also anxiety in Jamaica as to whether the schedule of the IMF would permit the IMF to approve the loan to Jamaica by the end of March.

Cross Listed Companies

GraceKennedy Limited (GKC)

GKC announced the participation of two of its subsidiaries – First Global Bank and First Global Financial Services in the NDX2. GKC has GOJ investment securities valued at J$39.4B, which represents 37 per cent of Total assets.

GKC has reported that the impact of the NDX on the Company's statement of financial position is projected to be less than 2 per cent of owners' equity.

Post NDX, the weighted average coupon yield on the Company's Jamaican dollar denominated instruments with a total face value of J$1.5B fell 2.7 per cent to 7.77 per cent. The weighted average tenor of those securities was extended from 5.54 years to 10.21 years. Also, the weighted average coupon yield on the Company's US dollar denominated instruments with a total face value of US$3.7M declined 2 per cent from 7.25 per cent whilst the weighted average tenor of those securities more than doubled from 3 years to 7 years.

On the TTSE GKC's price has depreciated 21 per cent to $3.15 on March 27th since the NDX announcement. GKC is currently trading at a trailing P/E of 5.9 times compared to 7.5 times prior the NDX. Bourse recommends a HOLD.

National Commercial Bank of Jamaica Limited (NCBJ)

On February 20th, 2013 NCBJ stated it will participate fully in the NDX. The Group and its subsidiaries exchanged approximately J$118B of bonds under the NDX. Based on information gleaned from the 2012 Annual report, the Group's total exposure to GOJ debt securities stands at approximately 51 per cent of Total Assets, or J$193.3B.

On the Income statement side, NCBJ expects its future earnings to be impacted by a decline in interest income as the new bonds carry lower interest rates.

Post-NDX NCBJ's price on the Trinidad and Tobago Stock Exchange (TTSE) has depreciated 10 per cent to close at $1.30 as at March 27th, recovering from a low of $1.10 on March 4th. Post NDX the stock is trading at a trailing P/E of 4.7 times, down from 5.3 times. Bourse recommends a SELL.

NCBJ is one of the financial institutions reportedly approached by the Government to participate in NDX2.

Jamaican Money Market Brokers Limited (JMMB)

JMMB is another major participant in the NDX. The Group is also a key stakeholder in the Economic Programme Oversight Committee, which was established to rectify the flaws of the first debt swap.

GOJ securities account for approximately 65 per cent of JMMB's Assets.

After the NDX, JMMB's price has depreciated 22 per cent closing at $0.50 on March 27th (Exhibit 1). JMMB is trading at a trailing P/E multiple of 3.3 times versus 4.2 times Pre-NDX. Bourse recommends a SELL.

Scotia Investments Jamaica Limited (SIJL)

SIJL is a subsidiary of Scotia Group Jamaica Limited (Scotia Group). Scotia Group accounted for approximately 14 per cent of the bonds swapped in the NDX, exchanging bonds with a face value of J$119.4B.

Approximately 86 per cent of SIJL's Total Assets are GOJ securities.

Post NDX, SIJL's price has depreciated 25 per cent on the TTSE closing at $1.50 on March 27th. SIJL is currently trading at a P/E of 5 times, down from 6.6 times Pre-NDX. Bourse recommends a SELL.

Sagicor Financial Corporation (SFC)

SFC is the largest regional insurer, with US$5.6B in assets and equity capital of US$860M, supporting a diversified portfolio of businesses in twenty two different countries. As noted in a press release by SFC, the NDX is expected to have an immaterial impact on the capital, and no significant long-term impact on the earnings of the Group.

SFC's GOJ securities stood at US$1.1B, representing 31 per cent of its investment portfolio. SFC has an overall interest of 51 per cent in Sagicor Life Jamaica (SLJ). Using SFC's 2011 Annual report, SLJ contributed 32 per cent of SFC's total revenue.

Dodridge Miller, President and CEO of Sagicor Group stated his confidence in the well-established business operations in Jamaica expecting the subsidiary to continue to make positive contributions to the overall performance of the Group.

Post NDX, SFC's price has depreciated 16 per cent closing at $6.00 on March 27th. Bourse recommends a HOLD.

Non-Cross Listed

Guardian Holdings Limited (GHL)

As stated in the December 31st 2012 Chairman's report, the face value of the affected bonds held by GHL's Jamaican subsidiaries amounts to J$31B. One of GHL's subsidiaries, Guardian Life, is reportedly one of the eight financial institutions being asked to participate in the NDX 2.

It is anticipated that the NDX will lower investment income and lengthen GHL's yield curve. In the First quarter of 2013, GHL expects to have a realised loss related to the NDX of approximately TT$35M. The Group stated they have already identified a number of mitigation strategies which is expected to reduce the overall impact on 2013 earnings to around TT$10M, which translates to a fall in earnings per share of $0.04. GHL expects at least 20 per cent of its revenue and profits to emanate from its Jamaican business interests this year.

Post NDX, GHL's price has appreciated 1 per cent closing at $19.50 on March 27th, reaching a high of $19.97 on February 14th.GHL is currently trading at a trailing P/E of 13.7 times. Bourse recommends a BUY.

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