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Dylan Coke | Tapping the capital markets, one way to become a corporate Olympian

Published:Wednesday | October 19, 2016 | 10:00 AM
Dylan Coke
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Witnessing the feats of Jamaican athletes at the XXXI Olympiad reminds us of Jamaica's ability to produce exceptional performances.

But there's another area in which Jamaica outperforms. It may surprise you to know that Jamaica has probably the most active and well-developed capital markets in the Caribbean. By capital markets, I refer to that part of a financial system where companies raise debt/equity funding, as distinct from loan funding obtained from banks.

According to the Financial Services Commission, the total value of private placements in Jamaica climbed from US$191 million in 2012 to over US$382 million in 2015.

Note that this number captures only private placements where companies raise funding from small groups of individual/

corporate investors. It does not cover many other types of capital markets transactions, including initial public offerings on the Jamaica Stock Exchange's main and junior markets such as the recent tTech and Portland JSX IPOs; rights issues such as those done last year by Proven Investments and Sagicor X-Fund; public offers for minority shares in listed companies like those done by Dolphin Discovery and Heineken when acquiring Dolphin Cove and Red Stripe, respectively; and sale-and-leaseback transactions.

In effect, a substantial volume and variety of capital markets transactions are successfully done in Jamaica each year, raising considerable amounts of money in the process. That being the case, why aren't more savvy Jamaican business persons looking to use the capital markets as a source of funding?

There are a number of reasons, for businesses hoping to raise funds, to examine the capital markets at this time. One is the performance of Jamaica's macroeconomic indicators that have been trending in a positive direction. Inflation is at historic lows, interest rates have fallen sharply making the issuance of debt more affordable, and the pace of devaluation has moderated.

The Extended Fund Facility signed with the International Monetary Fund in 2013 has helped create a framework for greater fiscal discipline and the GOJ has indicated its willingness to maintain a relationship with the IMF once the existing facility ends.

Together, these factors help to create a more stable and predictable environment that makes it easier for businesses to plan their financing needs, and also makes investors more inclined to invest in those businesses, and do so for the long term.

The investors participating in capital markets transactions are in need of a variety of investment types for their portfolios including debt and equity and the many variations in-between.

 

TYPES OF FINANCING

 

This creates the opportunity for companies looking to raise money to do so in a variety of different ways. Private placements of debt, IPOs, rights issues, sales and leaseback are just a few of the transaction types possible in the capital markets. The beauty of the capital markets is its flexibility that is, its ability to match investors looking to tailor their investments according to their needs, as determined by regulation, risk appetite and desired yield, to be matched with companies looking to tailor their fundraising according to their needs, as determined by ability to pay, collateral available, etc.

Working with an experienced investment bank allows you to design a fundraising structure that meets both the needs of the company and the needs of investors in the market.

Capital markets investors represent deep pools of capital. Depending on the type of instrument your investment banker structures for you, he may approach high net worth individuals, investment houses, insurance companies, mutual funds, unit trusts, corporate investors and/or pension funds who cumulatively have large amounts of investable funds. As an example, the private pension fund industry in Jamaica manages over $300 billion in assets.

GOJ is less active in the market than it used to be and, as a result of this and other factors, investment managers are actively looking for quality investments. Provided the structure created is attractive to them, these entities are capable of investing large amounts of money in your venture.

But don't let the big numbers fool you. The capital markets are not open to large corporations only. Many small and medium companies have taken advantage of the favourable tax advantages offered by the junior market to raise funds for their business. In 2016, already six companies have listed on the JSE junior market, raising hundreds of millions of dollars in the process.

In sum, there are a number of factors which create an ideal context for capital markets fundraisings, including the fact that current macroeconomic conditions are positive, the means of raising the funds can be tailored to specific needs, and there are substantial amounts of funding available for companies of varying sizes once an appropriate transaction structure has been identified.

- Dylan Coke is Vice- President Origination & Capital Markets at Scotia Investments Jamaica Limited. dylan.coke@scotiabank.com