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To sell or hold: the CLICO bond conundrum

This week, we at Bourse focus on the investment implications for persons still holding ‘CLICO Bonds’. These bonds are serial Government of Trinidad and Tobago zero coupon bonds, maturing consecutively over the twenty (now eighteen) year period November 2011- 2031 which were issued to CLICO policyholders. Recent reports indicate the Court of Appeal ruled that the Government’s bailout plan for CLICO was appropriate. This reverses the judgement of the High Court, which ruled that approximately $1.4 billion should be paid in full to policyholders of the United Policyholders Group.
We examine hereunder certain investment scenarios which may be considered by current CLICO Bondholders with a view to enhancing returns by switching out of, rather than continuing to hold, these Bonds.

The 3-10 year Tranche
Bond holders would have received two full payments by now on November 30th of 2012 and 2013. This leaves eight years of bonds which cannot be converted to units in the CLICO Investment Fund, as this would only apply to the 11-20 Bonds. These bonds do not have a coupon, which means that only the full face value is paid each year upon maturity without any additional interest. Many persons have sold these bonds in order to invest in other seemingly more attractive opportunities intended to improve upon the value of the bonds held to maturity. This is a more proactive approach that could provide better benefit to the bondholder. A quick read of the market suggests the rate offered on these bonds, i.e. the 3-10 bonds as a block, is between 80 and 84 cents on the dollar.

Should bondholders sell or hold?
The choice of holding versus selling ultimately comes down to which option would likely provide bond holders with better value generation. The opportunity cost of holding on to the bonds should be weighed against the other opportunities that exist in the market. One approach may be to evaluate selling the CLICO bonds at the current market rate and pursue the following course of purchasing an alternative set of investments which will yield more than the bonds. The primary reason to sell is to obtain a better rate of return than waiting for each maturity. The graph below illustrates the difference in returns from selling at the current rate and investing the entire amount, versus waiting for each bond to mature and then investing the new amount every year. In this stylistic scenario, were an investor able to earn a rate of 5.5 per cent on his/her investments then it would certainly make sense to do sell one’s bond holdings and invest. This rate of return may be achieved by purchasing local equities, which would provide a combination of dividends and capital appreciation. Additionally, for those investors with the ability to convert to USD, investment grade emerging market bonds could also provide this level of return.

The 11-20 year Tranche
Bond holders who are residents of Trinidad and Tobago, Guyana, Cayman Islands or an Eastern Caribbean state have the option of converting these bonds to units in the CLICO Investment Fund. This is done at a rate of 1 unit for every $25 in face value of bonds. For non-resident holders, they can either hold the bonds to maturity or sell the bonds at the current market rates which may vary between 66 and 70 cents on the dollar. The benefits for non-resident holders to sell their 11-20 bonds are similar to those of achieved by selling their 3-10 bonds.

CLICO Investment Fund
The CIF closed-ended mutual fund has an estimated total asset value of $5.54B (204 million units at a Net Asset Value (NAV) of $27.43, as at 25th June 2014. The traded value of CIF Units closed at a price of $21.55 on the Trinidad and Tobago Stock Exchange as at June 25th 2014, representing a discount of 21.4 per cent. The underlying investments of the Fund are over 40.07 million Republic Bank shares and Government of Trinidad and Tobago (GORTT) bonds of $703 million, 4.25 per cent coupon, 25 year maturity at par value. The CIF has, at present, a trailing 12-month dividend yield of 4.47 per cent on its June 26th closing price of $21.50.
Investors holding CIF units are indirectly gaining RBL exposure at a discounted price when compared to the current market price of RBL. Investors also have the future benefit of an explicit claim to RBL shares upon closure of the CIF structure in January 2023.

Investor Considerations
The options available to the holders of the 3-10 year (2014-2021 tranches) bonds remain either holding the bonds to maturity or selling at current market rates. The alternative of selling allows bond holders to receive cash payment for their bonds within a few days, at a discount to the face value. The benefit to the investor is the freeing up of capital for reinvestment and other uses. This may be especially appealing to investors, in light of other opportunities which are on the local investment horizon.
In determining which decision may be right for your unique circumstances, investors should, as always, consult with their preferred and experienced investment advisor, of which Bourse is one.
For more information on the options available to CLICO bond holders, contact Bourse Securities Limited at 628-9100, email us at fixed.income@boursefinancial.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. The production of this publication is not to in any way establish an offer or solicit for the subscription, purchase or sale of the any securities stated herein to US persons or to contradict any laws of jurisdictions which would interpret our research to be an offer.
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