Tue | Dec 11, 2018

Some fincos had a bad June quarter and they blame Barbados

Published:Friday | August 31, 2018 | 12:00 AM
Prime Minister of Barbados, Mia Mottley, began attacking the country's economic problems shortly after taking office earlier this year. The country defaulted on its external debt on June 1 and has suspended interest payments amid the reforms.

It was a rare event for Sagicor Group Jamaica Limited.

The insurance and banking conglomerate's profit for the second quarter ending June fell 14 per cent year-on-year due, in part, to the fallout from sovereign bonds held by its investment subsidiary. Weeks before the quarter closed, the Barbados government had defaulted on its foreign debt, and that event rippled across balance sheets in Jamaica and elsewhere.

Sagicor Group, now led by Christopher Zacca who became CEO a year ago, did not specify the losses from the bond, but its quarterly profit dipped from $3 billion to $2.6 billion.

The outcome was much worse for Victoria Mutual Investments Limited, VMIL, whose second-quarter profit plunged 77 per cent, from $75 million to less than $18 million, but would have risen by 20 per cent had Barbados not defaulted.

Victoria Mutual, however, is hanging on to the bonds.

"We continue to hold these securities and monitor the discussions between the government of Barbados (GOB) and the IMF and its external creditors, the outcome of which we believe will provide a platform for a recovery of the Barbadian economy," said CEO Devon Barrett in a statement accompanying the financial report. "Additionally, the GOB bonds have recovered some value since the default event on June 1, 2018," he said.

The GOB bonds currently trade at less than 50 cents on the dollar, with interest payments suspended for external bondholders.

"The writing was on the wall," said Eugene Stanley, vice-president of fixed income and foreign exchange at Sterling Asset Management Limited, whose company had avoided the bonds.

The concerns started for Stanley around five years ago when Barbados' fiscal deficit hovered at 11 per cent, well above the single-digit acceptable levels. Over the years, the Caribbean nation's deficit dropped to roughly 4.0 per cent but the economy remained sluggish, debt to GDP hitting 175 per cent this year due to arrears not previously included in headline public debt figures. Additionally, international rating agencies issued a series of downgrades - some moving from high B to D ratings, reflecting default.

Stanley said that in the past, some institutions were pushing these bonds, but Sterling opted for other less risky investments with better returns.

"It used to be pushed hard to investors, now they have declared default on foreign debt," he said - a reference to the decision announced in June by newly elected Prime Minister Mia Mottley, that Barbados would seek to restructure its debt and halt interest payments on sovereign bonds held externally.

Some 70 per cent of Barbados' debt is held locally and 30 per cent externally by commercial creditors. The country continues to service its local debt.

"I can't understand how Barbados is going to access the international markets after this default. They will have to convince the international community," said Sterling's Assistant Vice-president for Trading and Business Development, Yanique Leiba-Ebanks.

The bonds, she added, were illiquid and rarely traded and therefore required time and patience to exit.

Going forward, Leiba-Ebanks said Barbados needs to consider devaluing its currency as a means of improving its tourism competitiveness and reducing the costly defence of its exchange rate. The BDS is pegged to the US dollar at a rate of 2:1.

"She has to devalue the currency. Yes, she will get some flak for it, but it is necessary," Leiba-Ebanks said.

Sterling Investments Limited, which is managed by Sterling Assets, invests 40 per cent of its portfolio in emerging market bonds and 60 per cent in developed market bonds, according to its latest annual report. The company doesn't own Barbados bonds. Its profit for June rose from $43 million to $52 million.

The Sterling managers said Barbados can learn from its less affluent Caricom partner, Jamaica, which successfully completed two debt exchanges in its negotiations with the International Monetary Fund (IMF) over the last decade.

Efforts to ascertain from some of the other large financial houses in Jamaica their degree of exposure to GOB bonds were unsuccessful. But new accounting rules, IFRS 9, require companies to make provisions for expected credit losses from impaired investments.

For VMIL that provision amounted to $109.6 million in June. The bonds are held by its wholly owned subsidiary, Victoria Mutual Wealth Management Limited.

"We anticipate a resumption of payments once they've worked out their [IMF] programme," said research manager at VM Wealth, Nicole Adamson.

The new IFRS 9 rules require companies to account for all possible default events. Without the provision, VMIL's net profit for the quarter would have totalled $90.6 million, or 20.4 per cent more year-on-year, and $169.3 million or 19.13 per cent more over six months.

Sagicor Group reported to shareholders that it took a hit both from "a large capital loss on certain bonds which were redeemed during February" as well as "possible impairment" of investments in the GOB bonds.

The second-largest owner of Sagicor Group, PanJam Investments Limited, was also affected by the Barbados default, albeit indirectly. It's portion of Sagicor's earnings fell by $118 million at half-year, but it still booked a cool $1.6 billion as its 31 per cent share of the $5.2 billion made by Sagicor Group in the period.

PanJam itself also came out ahead with a $46-million increase in second-quarter profit to $988 million, a boost that resulted from the property and investment conglomerate's exit of a Canadian investment for which it booked a gain of $47 million. Over six months its profit edged up from $1.78 billion to $1.82 billion.

Proven Investments Limited, an investment management company, booked impairments of US$408,200 ($53 million) on its financial assets, but while the company referenced Barbados' emergency plan to fix its ailing economy with the help of the IMF, Proven did not specify how much, if any, of the provision related to GOB bonds and did not respond to requests for comment.

steven.jackson@gleanerjm.com