By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government’s $1.067bn bond refinancing was yesterday hailed as a “monumental transaction” that requires further explanation to determine if The Bahamas got “the best deal” possible.

Gowon Bowe, Fidelity Bank (Bahamas) chief executive, told Tribune Business that the size of the Davis administration’s foreign currency capital raise - and the fact it was almost four times’ over-subscribed - signalled that international investors have “great confidence in the country”, its economic prospects and progress on fiscal consolidation.

Pointing out that investors “wouldn’t have run to it” if they believed there was a risk The Bahamas will default on its sovereign debt repayments, he nevertheless argued that the Government’s financing strategy needed to be “better articulated” and several questions require answers from the administration and its advisers.

Mr Bowe, while emphasising that he did not want to “dampen pride that are bonds are seen as investment worthy” by the global capital markets, questioned the timing and apparent “urgency” to “accelerate this transaction” now given widely-held expectations of forthcoming US interest cuts and similar actions in other major markets over the next 12-18 months.

He told this newspaper that delaying the bond’s placement to coincide with anticipated global interest rate cuts could have enabled The Bahamas to obtain a better, or lower, debt servicing cost than the 8.25 percent interest coupon now attached to the $1.067bn bond.

Mr Bowe also noted the discrepancies between the cash prices offered by The Bahamas to repurchase existing bonds held by investors. The Government had initially offered to repurchase $2.2bn worth of outstanding foreign currency bonds, spread across six issues with maturities ranging from 2028 to 2038, with the deal to be funded by the proceeds of the new $1.067bn capital raise.

The Fidelity Bank (Bahamas) chief said the purchase price offered to investors holding the bonds due to mature in 2033 and 2038 represented a “discount” to these securities face or ‘par’ value of 9.5 percent and 13.8 percent, respectively. This, he added, suggested the yield sought by investors on these bonds was higher than their respective interest coupons of 6.625 percent and 7.125 percent.

However, the opposite occurred with the Government’s bonds set to mature in 2028 and 2029. Investor holding the former bond were offered a purchase price equal to par, or face, value, while those who bought into the other security - priced with a 9 percent coupon because it was issued at COVID’s peak - received a 6.2 percent premium.

As a result, Mr Bowe questioned whether The Bahamas is “taking early upfront gains” from the discounted repurchase of bond principal in return for “long-term higher costs” via greater interest/debt servicing costs. In particular, the investors handing over $451m from the bond maturing in 2028 are exchanging a 6 percent interest coupon for the higher 8.25 percent.

This means they will gain higher returns from the refinancing. And, of the six existing bond series involved in the refinance, only two have higher interest coupons than the new bond’s 8.25 percent, meaning that the demand on Bahamian taxpayers to service this new debt may have actually increased as a result of this deal.

As a result, Mr Bowe said the Government needed to explain whether the main purpose of the bond refinancing was to reduce debt servicing costs or merely extend out further the date when principal must be repaid to investors. If it was the former objective, this was unlikely to have been met, while if it was the latter goal there were no issues set to mature for three years.

The Fidelity Bank (Bahamas) chief spoke out after the Government confirmed the $1.067bn transaction that was revealed by Tribune Business yesterday. Besides the amount involved, this newspaper also disclosed the 11-year (2036) maturity and 8.25 percent interest rate, as well as the use of the $300m balance for infrastructure investment.

Confirming that the bond’s placement has been completed, and that $767m will be used to fund the repurchase of existing bonds from their owners, the Prime Minister’s Office said: “As part of the transaction, authorities conducted a three-day investor roadshow, reaching over 60 accounts from North America, Europe and the Middle East.

“Participants expressed strong support for The Bahamas’ credit fundamentals, ongoing fiscal consolidation and economic outlook, driving positive transaction outcomes. The $1.067bn new issuance benefited from supportive demand dynamics, closing with an order book that was 3.9 times oversubscribed and a final coupon and re-offer yield of 8.25 percent. 

“This transaction further consolidates the favorable repricing of The Bahamas’ international yield curve.” The Government hailed the transaction as a “successful return” to the private international capital debt markets by The Bahamas, adding that it had extended “the average maturity” of its outstanding bonds by 2.1 years.

It also said the deal had “reduced principal payments by $451m over the next three years”. This, though, does not mean that The Bahamas has cut or reduced its debt obligations but merely pushed out the date for repayment by eight years - from 2028 to 2036.

Mr Bowe told Tribune Business: “I think this is probably one of the most monumental announcements by the Government, but also one that highlights a lack of comprehensive disclosure. What I mean by that is there are a number of positive elements embedded in the transaction, but a number of other areas that require further details to answer questions.

“On the positive side, I think it is very important to note that, in order to get $1bn - and they indicated it was almost four times’ over-subscribed - that indicates there is great confidence in the country. I don’t believe in superlatives, but it means there is an acknowledgement by investors that The Bahamas has capacity to pay and its sovereign debt is worthy of investment.

“No matter what price is offered, if there is a significant risk of non-payment persons won’t run to it. It’s important to note that, in accessing capital markets with the size if transaction that has been achieved, that requires confidence by investors notwithstanding whether your credit rating is high or low.”

Mr Bowe said that better-than-anticipated economic growth numbers, and fiscal improvement “though not to the extent that the Government says”, has “been validated by the size of the transaction”. However, there were other questions that required answers.

Given previous IMF findings that The Bahamas’ debt interest costs are driven by the markets more than local factors, he questioned “why would you look to execute this transaction now” given predictions of US interest rate cuts over the next 12-18 months to help ward-off a potential economic slowdown. Any reduction, especially in US rates, would likely lower The Bahamas’ own borrowing costs.

Noting that the $1.067bn bond’s 8.25 percent coupon is “not a significant premium” to US Prime at 7.5 percent, Mr Bowe said: “The question I have here is, if you look at the forward interest rate yield curve, with most expecting a slowdown in the US and global economy in the next 12-18 months, why would the Government see the urgency to do it now?

“Why would you accelerate this transaction now when there’s a possibility that global and US market rates will reduce over the next 12-18 months? What’s the advice and basis for doing it now? Why that’s further curious to me is that we don’t have any debt coming due until 2028. There was no refinancing urgency coming due today.”

And, noting that the 8.25 percent coupon is “higher than most of the instruments being refinanced”, Mr Bowe added: “Why take on more expensive debt to replace cheaper debt when you didn’t have the urgency on refinancing.”

He conceded that the Government may have been advised to “take the funding now”, amid projections of the 2025-2026 Budget surplus, improving economic and fiscal indicators, and said: “It’s not to dampen pride that our bonds are investment worthy, but it begs the question: Did we negotiate the best deal we could given the circumstances we are in?”

Turning to the different bond repurchase prices offered by the Government to investors, the Fidelity Bank (Bahamas) chief continued: “It really says why are we offering repurchase prices that increased interest rates higher when, on the 2028 maturity that was priced at 6 percent, we offered par, which suggests the actual rate for The Bahamas is going to be 6 percent.”

While The Bahamas will gain from repurchasing some existing bond issues at a discount to their face value, Mr Bowe said this is likely to be outweighed by higher debt servicing or interest costs associated with the new 8.25 percent coupon.

“Are we taking early gains for long-term higher costs,” he asked. “Those [existing bonds] were already at lower interest rates with extended maturities and were not causing any significant repayment pressure other than the 2028, which was at 6 percent.... There wasn’t a significant principal gain on the refinance, but interest costs on all the instruments are higher that what was refinanced.

“If the Government’s strategy was to reduce debt servicing costs, this transaction needs further explanation. If the transaction was to extend the maturity profile, we need to ask what the purpose was because none of them raised refinancing concerns.” The $609m bond due to mature in 2028 is “not a small amount”, but the Government is forecasting to run successive fiscal surpluses by then.

Emphasising that he was not trying to diminish the bond’s placement, Mr Bowe said: “It boils down to the financing strategy not being properly articulated. Did we raise our skirt a little bit too early, so to speak, in going to market when we could have got a better interest rate with greater patience?

“I define it as one of the most monumental transactions done in recent history given the size. That needs to be recognised and given its due, but let’s make sure this not a pyrrhic victory where we’ve won in the short-term by refinancing but what lost by what it’s cost us in the long run.

“Let’s have a clear answer to these questions so we are confident this is the best deal available to us, and this is not a case of more haste, less speed, where we did this too quickly.... I expect the Government has answers to my questions. It’s good news, it shows investor confidence, but it needs clarity so that we know we have leveraged our position for the best deal we could possibly have.”

Rothschild & Company and Hogan Lovells served, respectively, as sole financial advisor and international legal counsel to the Ministry of Finance on the $1.067bn bond refinance transaction. BNP Paribas, Citi and Deutsche Bank served as global co-ordinators and joint bookrunners, with CIBC FirstCaribbean serving as joint bookrunner.