Fri | Oct 30, 2020

US dollar securities more than a third of debt market - Falling interest rates are poised to change that

Published:Wednesday | July 25, 2018 | 12:00 AM
Julian Mair, chief investment strategist at JMMB Group Limited.
Johann Heaven, president and CEO of Proven Wealth Limited.

The Financial Services Commission, FSC, whose quarterly release of industry data offers for the first time a breakout of new securities issues, indicates that well over a third of new debt issues are denominated in US currency.

The data also shows a decline in such borrowings.

Over the course of one year ending this March, US dollar securities amounted to US$902 million or 39 per cent of all issues, with all the rest denominated in Jamaican dollars. For the 2017 period, hard currency dollar issues topped US$1.04 billion, but FSC gave no indication of the proportion they represented.

Brokers say the debt issues were, in the main, unlisted issuances done through private placement.

The take-up, according to JMMB Group's chief investment strategist, Julian Mair, is largely for business purposes.

"Some entities that earn USD or have revenue benchmarked in USD need to borrow in that same currency so as to match liabilities to their revenue. Also, some companies have huge needs of USD and as such, borrowing it is more efficient than borrowing JMD and then buying USD," Mair told the Financial Gleaner.

The value of the Jamaican dollar hit fresh lows of above $134 to the USD on Tuesday. Although the exchange rate has been swinging in different directions, its value year to date is down by $8 to $9 as of this week.

However, Mair says the activity in the debt market would not have contributed to the volatility.

"Issuing in USD does not lead to pressure on the dollar, as a substantial portion of deposits, etc, in Jamaica are already in USD," he said.

A store of value

Johann Heaven, president and CEO of brokerage and investment firm Proven Wealth Limited, said investors have been showing a preference for US dollar issues as a store of value.

"The financing terms for corporate issuances, which includes the currency of issue, is not only a function of the requirements of the issuing firm, but also a function of the appetite of the investing public. Over the recent past, investors have preferred the safe haven of the US dollar to protect against the devaluation of the Jamaican dollar," said Heaven

It's resulted, he said, "in many firms opting for US dollar debt, as it has been an easier sell to the market."

The FSC said last week that there were 196 outstanding securities registered under the exempt distribution guidelines by 83 issuers. The 'exempt market' describes securities sold without the protections associated with a prospectus.

Generally, securities offered to the public must be offered with a prospectus - a document that provides detailed information about the security and the company offering it. However, there are some exemptions to this rule where the securities are pitched at institutional and high net worth investors.

Of the 196 distributions registered as of March, 46 were new securities issued in the past year. FSC also reported that 22 new issuers entering the market in the same period.

The majority of the registered issuances, 91 per cent, were debt securities. And the value of securities issued via exempt distribution was estimated at $280 billion - 61 per cent of which were denominated in JMD and 39 per cent in USD.

"If the firm is a US dollar earner, borrowing in US dollars is the preferred option because it is cheaper than borrowing in Jamaican dollars and the issuer has limited currency exposure, as they earn US dollars," said Heaven.

But he also suggests that the attractiveness of US dollar issues might change in time, depending on how low interest rates get and the stability of the Jamaican dollar.

The Bank of Jamaica policy rate was reset to a new low of two per cent in June. That signal rate is expected to eventually lead to the lowering of bank lending rates on Jamaican dollar borrowings. The central bank's next rate decision will be announced on August 28.

"As the Jamaican dollar stabilises and even revalues, as we have seen over the past few months, this dynamic will change and investors as well as issuers will have to re-examine the options available to them, including the optimal currency of issue, price and tenure of these debt structures," said Heaven.

He adds that Jamaican dollar interest rates are at "all-time lows" and companies can access funding at rates that are now very close to the price of raising debt in US dollars.

Bank lending rates for foreign currency loans are tracking between 7.34 per cent and 7.55 per cent, while JMD loans are averaging 15.37 per cent, according to central bank data.

"This dynamic will see Jamaican firms opting for more JMD-denominated debt and if the Jamaican dollar can keep its relative value against the US dollar, we will see a convergence, with the market also warming up to investing in Jamaican dollars, for the higher rate - albeit at much narrower spread to US dollar investments - than in the past," Heaven said.