By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Efforts to slash the Government’s more than 200 Bahamian dollar bond issues to a lesser number will start this year, the Central Bank’s governor has revealed, although no reduction target has been set.

John Rolle, responding to Tribune Business questions, said the “market efficient” number of bond issues is still being determined after the International Monetary Fund (IMF) argued they should be slashed by around 90 percent to reduce market “fragmentation”.

“Consolidating the more than 200 bonds in the market is scheduled to begin later in 2024 and will take a number of years to complete,” the Governor confirmed. “The framework to achieve this outcome required both the CSD (Bahamas government securities depository) and the Benchmark Issuance Policy to be in place and needs to be carefully implemented to avoid market dislocations.

“The market-efficient number of benchmark issues is still being determined, but the larger benchmark issues are expected improve the efficiency of the Government’s liquidity management operations. Through benchmark series, the Government is already able to raise funds on multiple reopening of the issues. 

“In the past, each of such transactions would have involved a new security. However, the consolidation strategy - once it is activated - will also include early buy back of some bonds prior to maturity, with the quantum of retired bonds replaced with fewer new instruments.”

Mr Rolle added that “all recommendations” in the IMF report, which sought to outline reforms for achieving a more modern and efficient Bahamian government domestic debt market, “will be either wholly or partially implemented commensurate with the speed with which the issuer and the market are able to achieve”.

He said: “The report was largely favourable and broadly mirrored recommendations and ongoing reforms under the Commonwealth Secretariat and United Nations Development Programme (UNDP) technical assistance arrangements.

“In terms of a definite timeline to advance many of the reforms, one would be difficult to pin down, as much of it depends on how actively the market absorbs the reforms. We are moving ahead with the recommendations in consultation with the Government and the market stakeholders at a pace agreeable to all.”

The Central Bank governor said both the Commonwealth Secretariat and UNDP have been providing help to develop The Bahamas’ domestic debt market since 2016. This resulted in both the creation of a separate depository specifically for the clearing and settlement of government securities transactions and the listing of bond issues on the Bahamas International Securities Exchange (BISX).

“Deployment of the CSD was required to automate parts of the primary and secondary bond market operations as well as efficiently operationalise other policy outcomes generated under the technical assistance programmes. That said, the Benchmark Issuance Policy and other policy reforms were under development for quite some time, and many benefited from input from the IMF during the process,” Mr Rolle added.

The recently-released IMF report argued that the Government should “consolidate” its 240 bond issues into just 20-30 “benchmark” lines via a series of measures including exchanging outstanding debt securities for new ones.

“The large number of government securities outstanding creates an illiquid and fragmented market. Given the lack of a benchmark bond policy, it is not reasonable to expect that one or more financial institutions would assume the role of a market maker for all government securities,” the IMF said in an assessment completed in January 2024 but not released until now.

“Efforts should be taken to consolidate the outstanding 240 BRS (Bahamas Registered Stock) lines into fewer 20-30 benchmark lines by using liability management operations. The consolidation of the outstanding debt could help stimulate secondary market trades in other bonds as well.”

The Fund repeated this call consolidation, stating: “The lack of a benchmark building policy is hindering market development efforts. Currently, there is no policy to build benchmark lines that would concentrate issuance on a smaller number of bonds that could be deemed ‘the’ benchmark in key tenors.

“Despite some re-openings, most BRS lines are small in size. The domestic market will remain fragmented until there are fewer BRS lines outstanding. The increased size of benchmark BRS lines could also attract wider investor participation, owing to increased perceptions of liquidity in the benchmark, and make it easier to find interested buyers or sellers in the secondary market.”

The Central Bank, which together with the Ministry of Finance would likely be sent an advance copy of the IMF’s findings, and discuss the Fund’s conclusions with it before the official release, already appears to have acted on the consolidation recommendation and be following much of what was suggested.

For it unveiled a document entitled ‘The Bahamas benchmark bond issuance policy’ on November 17, 2023, in which it set out its strategy for “aggregating bond issuances in a relatively limited number of popular, standardised maturities” on the Government’s behalf in a bid to boost investor confidence through greater transparency and develop a deeper, more liquid government securities market.

“With approximately 240 Bahamas Registered Stock (BRS) securities, comprising 149 fixed-rate and 90 floating-rate bonds, often issued with non-standardised features and varying original maturities, the bond market in The Bahamas faces significant market fragmentation,” the Central Bank said.

“The primary aim of the policy is to eliminate market fragmentation by adopting bond standardisation, concentrated issuance of bonds from benchmark maturities, bond reopening and the implementation of liability management operations, such as bond buybacks and exchanges.”

The Central Bank set the “benchmark” issue targets at $85m for Bahamian dollar bonds with maturities between three to five years; $105m for paper due to mature between seven to ten years; and $170m for 20 and 30-year maturities.

This appears to follow the IMF’s advice very closely, with the Fund’s just-released report stating: “Introduction of a benchmark issuance policy, accompanied by Liability Management Operations (LMOs) aimed at consolidating smaller securities into larger and therefore more liquid bond lines - one long-term line maturing in any given year instead of a multiple number of smaller issues - could form a strong base to support primary market demand and secondary market development.....

“Buybacks and exchange/switch auctions could consolidate the large number of outstanding bonds into a smaller number of larger benchmark securities and help manage future rollover risk inherent to the issuance of benchmark size securities. LMOs are quite common in the practice of public debt managers, but some market consultation and education would be useful before actual deployment.”

Outstanding Bahamian dollar bond issues, worth a collective $4.17bn at year-end 2022, are the instrument accounting for the greatest share of the Government’s total debt at 38 percent or just over one-third.