Thursday, July 11, 2019
By NEIL HARTNELL
Tribune Business Editor
Citibank has been selected as the lead adviser for the $450m-$550m mega financial restructuring of Bahamas Power & Light (BPL), Tribune Business has been informed.
Geoff Andrews, chairman of the special purpose vehicle (SPV) that is key to the refinancing of BPL’s multiple legacy liabilities, confirmed both the choice and size of the planned capital raising when contacted by this newspaper.
“They have been selected as the preferred bookrunner,” the former Deloitte & Touche accountant and partner said. “All of the respondents gave great proposals, and we had great meetings with them, but at the end we felt Citibank was the best prepared and qualified to lead us in the process.
“The other institutions are large and well-qualified. It was a very tough decision to make, but we felt Citibank was the best choice.”
Citibank had to beat off competition from rival bidders who included Goldman Sachs and a partnership between Credit Suisse and CIBC FirstCaribbean. Mr Andrews, who previously said more than three institutions were interviewed for the contract to act as financial adviser, placement agent and arranger for the refinancing, added that BPL also approved Citibank’s selection.
He then confirmed that BPL’s restructuring, which will involve the issuance of so-called Rate Reduction Bonds (RRBs) to private investors, will seek to raise between $450m to $550m in new debt financing.
“That’s probably the range we’re looking at,” Mr Andrews told Tribune Business. “We are still looking at raising a significant amount of that locally.” When the RRB financing was first mulled during the last Christie administration, it was suggested that as much as $650m might be required.
Mr Andrews, who heads The Bahamas Rate Reduction Bond Ltd, added that it was now working to “finalise” the contract with Citibank and - with BPL also involved - determine the terms, conditions and sum required from the RRB offering which is supposed to close by this November.
BPL’s refinancing, while essential to its future financial health, may provoke controversy among some elements of Bahamian society given that it is ultimately the state-owned energy monopoly’s customers that will pay for it via an extra charge that will be added to their monthly bills.
The original plan, developed by the former Christie administration under the Electricity Rate Reduction Bond Act, calls for the sums raised by this additional charge to be used to pay the interest owed to investors who purchase the bonds.
And it is the Bahamas Rate Reduction Bond Ltd, not BPL, that will be responsible for issuing the bonds and paying investors due interest. This structure will exchange BPL’s legacy Bahamas Electricity Corporation (BEC) debt and other liabilities for new debt, which will be kept off BPL’s balance sheet via the SPV’s role as issuing agent.
The old liabilities include around $350m in bond and bank debt; a $100m employee pension fund deficit; and other assorted liabilities including the cost of environmental clean-ups at various sites around The Bahamas. It is likely that some of the financing may also replace the $100m short-term funding that helped acquire the Wartsila engines.
However, one Bahamian banker argued that the Government should look to equity financing - through a combination of privatisation and an initial public offering (IPO) - rather than debt to solve BPL’s financial woes.
Julian Brown, president and chief executive of BISX-listed Benchmark (Bahamas), told Tribune Business that imposing further debt servicing obligations on a “bleeding company” was the wrong way to go.
Rather than further burden BPL or its customers, he argued that the Government should instead sell a 49 percent equity stake to an international utility partner that would come in and take operational control, with the remaining 51 percent stake sold to Bahamian institutional and retail investors via an IPO.
“It’s a waste of time,” Mr Brown said of the RRB or any debt refinancing. “All we’re doing is causing BPL to have another obligation to pay out money. Equity has no interest obligation until the company is fixed. Debt comes with interest payments that dilute the capital the company needs to turn itself around. A debt deal is not going to work”.
Interest on the planned RRB debt would be paid by its customers, not BPL, but Mr Brown continued: “It’s not a debt deal; it’s an equity deal. When you restructure a company you don’t take out debt; you do it with equity. Debt comes after your cash flow is higher, not before. You cannot fix BPL, a company that’s bleeding, with debt.
“I’m not criticising Dr Minnis. If he thinks I am, I apologise. This is in the national interest of all Bahamians. How can you grow the economy when the small guy cannot keep his doors open because the light doesn’t stay on? They’re fooling themselves. If they do not do anything else we’ll be having this discussion in 10-15 years after they’ve failed for the umpteenth time.”
Mr Brown said his restructuring model would work better than the previous management contract given to PowerSecure as the 49 percent equity stake would give the international utility partner skin in the game, and a compelling reason to focus on BPL’s management and its turnaround to ensure it yielded a return on its investment.
And the IPO would employ a “bottom’s up” format with low investment thresholds designed to enable small Bahamian retail investors to participate. “One of the most important things we need is electricity,” Mr Brown added. “We would be giving ordinary Bahamians the opportunity to participate in the future growth and development of the country, and one of the most significant parts of the economy.
“I think we can raise $500m very easily. The money is here, and when you sell 49 percent of the company you are bringing in foreign capital to fix the problem. You price it so the poor guys get in, and if you did it properly you could raise $500m in this market no problem.”
When this newspaper pointed out that the largest IPO in Bahamian capital markets history had been Commonwealth Brewery’s $62.5m, of which the National Insurance Board (NIB) had to pick up the final $10m-$12m balance, Mr Brown pointed to the $3.5bn deposited into the Bahamian banking system in 2018 as evidence of sufficient liquidity.
“This clearly shows that it is possible for a BPL IPO to raise anywhere from $100-500m easily in the public market,” he added. “This capital, along with the capital raised from the 49 percent sale to our strategic partner, will provide the necessary capital to finally put BPL in a position that will allow it to properly operate and not require annual government support.”
However, the Government already seems to have decided to go down an alternative route of the RRB and outsourcing New Providence’s energy generation to the proposed new Shell North America power plant.