Cash-needy firms slow to try capital market
Avia Collinder, Business Reporter
While loan rates for businesses are trending upwards, local businesses in need of working capital support or financing to expand are still not turning to the capital markets for alternative funding.
Marlene Street Forrest, general manager of the Jamaica Stock Exchange (JSE), said last Wednesday that while equity financing was a natural option for companies to turn to, there was limited appetite to tap the stock market for investors even as the banks continued to issue billions of loans.
"It would be expected that with tight credit, the option of equity financing would be most attractive. However, the tight credit squeeze has not yet converted into companies seeking equity capital through public offering and listing on the exchange," said Street Forrest.
"I am hoping we are expe-riencing a lag time between market conditions and action on the part of business owners."
Three companies have made initial public offerings since the start of the year, these being Margaritaville Turks Limited, Sweet River Abattoir, and Knutsford Express.
Together they raised $468 million from stock market investors.
Another $250 million offer of preference shares by Eppley Limited will open this week, while start-up medical marijuana company, Medicanja Jamaica Limited, will test the market with an IPO by the first quarter of 2015.
Conversely, local businesses have increased borrowing from commercial banks by $16 billion between January and August 2014, according to central bank data.
While over 70,000 companies are registered at the Companies Office of Jamaica, less than one per cent is listed on the JSE. There are 38 companies on the main market and 23 on the junior market.
Anecdotal reports of tough times experienced by large business in search of bank loans have come in alongside central bank reports that rates for business were up mid-year and predicted to go higher.
BOJ Credit Conditions Survey June 2014 predicted for the September quarter that interest rates on local currency business loans are expected to increase further, while rates on personal loans are expected to decline.
Rates rise and fall
The report said that average rates on local currency business loans increased by 1.13 percentage points to 16.52 per cent for the June quarter while rates on local currency personal loans declined from 20.69 per cent to 19.25 per cent for the quarter. Lenders also reported a rise of 1.08 points in interest rates on foreign currency business loans.
Investment banker, Christopher Berry, executive chairman of Mayberry Investments Limited and a former deputy chairman of the JSE, said local companies are slow on the uptake.
"Traditionally in Jamaica, people think of going to the bank first. Our business in that area has grown in the last five years, but it is in its infancy for Jamaica compared to more developed economies. Corporate notes, corporate bonds and equity ... when you look at Jamaica from an international perspective, we are like 10 years behind what's happening."
Berry's firm has been at the forefront of arranging listings for the junior market, the platform for which was created just five years ago by the JSE.
The exchange has more recently opened up a platform for bond trading, but so far, only two companies have floated corporate issues through the JSE - Access Financial Services and Jamaican Teas Limited.
Outside of the stock market, Berry said that local firms were coming up with more sophisticated products for firms seeking alternatives to commercial bank borrowing.
President of the Jamaica Bankers Association (JBA), Maureen Hayden-Cater, said this week that banks are setting rates in relation to perceived risks.
"The current status of higher interest rates to businesses may be more a function of the risk associated with longer-term financing and this will be reviewed by the banking sector as economic conditions continue to improve," she said.
"Banks are in the business of lending, it's their lifeblood, but each loan is assessed on its own merit and there is absolutely no disconnect between the banking industry and their need to continue to lend and grow the Jamaican economy," she said.
The JBA president also noted that JMD rates have generally trended upwards over the last year to July 2014, driven by weak liquidity conditions, but that these have been tempered by BOJ interventions.
"Since August 2014, the Bank of Jamaica has been providing support to the market through liquidity facilities which have alleviated the generally illiquid conditions that existed in the JMD money market," said Hayden-Cater.
"With continued support by the BOJ to improve liquidity, there has been a general trending downwards of money market interest rates."
However, the perception of risk, under current economic conditions, continues to affect the willingness of banks to lend, she said.