By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Bank of the Bahamas International will use a substantial equity capital injection by its majority shareholder to eliminate $18.5 million worth of debt securities, as it “remodels” its balance sheet to meet international regulatory requirements and domestic economy stresses.

Paul McWeeney, the BISX-listed institution’s managing director, told Tribune Business that proceeds from the $31.5 million issue would be used to repay both a $13.5 million bond and $5 million in outstanding mortgage-backed securities.

The bond issue is held entirely by the National Insurance Board (NIB), while the mortgage-backed bonds are owed to other investors, and Mr McWeeney said the capital infusion from its largest shareholder - the Government - would enable the bank to “substantially eliminate” many of its balance sheet liabilities.

He disclosed to Tribune Business that Bank of the Bahamas International planned to pay out the remaining $5 million in mortgage-backed bonds “within the next three months”.

And, despite having 10 years to replace its $35.416 million in preference share capital, Mr McWeeney said the bank would look to start that process this year.

The 5,977,230 ordinary shares issued to the Government via private placement, at the current BISX trading price of $5.27, are non-voting so as not to dilute Bank of the Bahamas International’s 49 per cent minority shareholders.

Describing the latest issue, which was picked up 100 per cent by the Government, as being in ‘a class of their own’, Mr McWeeney told Tribune Business: “We’re going through the process of issuing the shares to the majority shareholder, and the intent is to raise through this transaction $31.5 million, which is to bolster the capital base.

“With the proceeds provided through that, as well as internally-generated funds, we will substantially eliminate all of the liabilities.”

Those liabilities are primarily the NIB bond and mortgage-backed securities. Mr McWeeney said Bank of the Bahamas International “redeemed another $5 million worth of mortgage-backed bonds” in June, leaving an equivalent amount outstanding.

“We plan to liquidate all those within the next three months,” he told Tribune Business of the remaining $5 million in mortgage-backed bonds.

“It’s about remodelling the balance sheet, taking into account the new requirements, as well as making the bank a lot leaner.”

Bank of the Bahamas International is effectively restructuring its balance sheet by replacing more expensive debt capital (bonds) with equity. While not quite a recapitalisation, its total ordinary share capital will now rise to $75.688 million from $44.101 million.

The Government currently holds a collective 51.82 per cent equity stake in Bank of the Bahamas International, with 24.04 per cent held by the Treasury and 27.78 per cent in the hands of the National Insurance Board (NIB). It is unclear which entity will pick the shares up, or if both will.

Bank of the Bahamas International’s 4,000 private shareholders collectively hold the remainder of its equity. Post the Government’s capital injection, total shareholder equity - as based on end-May 2013’s unaudited financials - stands at $148.776 million.

Mr McWeeney told Tribune Business that the effects will also be seen on Bank of the Bahamas International’s income statement, as the elimination of the bonds will allow it to “cut down on interest expense by several million dollars a year”.

Describing these savings as “significant”, especially in an environment where bank profits were depressed, Mr McWeeney added: “This considerable growth in capital allows you to take a more conservative assessment of the loan portfolio, and take provisions without undermining the capital base.

“You also improve your operating performance because of the reduction in interest expense. We are fully compliant with Basle III, and all we have to work on now is reducing our preference shares. We have 10 years to do that. We’ll start that process this year subject to regulatory approval.”

Mr McWeeney said Bank of the Bahamas International had to take loan loss provisions both for its long-term health and to meet regulatory and accounting requirements.

Disclosing that he expected a “challenging” 2013, due to the continued weak economy and associated non-performing loans, he added that the Government’s capital injection “stands us in good stead for the future”.

The share issue already has Securities Commission approval, and now just awaits Central Bank of the Bahamas sign-off.

“Since going public in 1994, the bank has made well over $100 million in profits,” Mr McWeeney told Tribune Business.

“”There will be times in any organisation when you have to go through difficult periods, and this is how we deal with it - remodelling the balance sheet and making sure the capital base is strong enough to withstand the economy.

“It’s not an overnight transition. We’re trying to manage this book of business through tough times. We’re going through a period of correction, where liquidity is very strong. We’re just focused on remodelling the balance sheet and generating new lines of business, like electronic banking.”