Gov't debt losing appeal amid uncertainty

Marcella Scarlett, Business Reporter

The Finance ministry this month raised J$5.95 billion from new subscriptions to a long-term bond initially floated in August, but the float has substantially underperformed previous issues as the market weighs the performance of interest rates and an IMF deal in limbo.

Two fixed-rate bonds issued over the summer were virtually ignored by the market - the two placements combined raised less than a billion dollars.

The variable-rate bond, GOJ VR 2022, raised a combined J$21.98 billion at its issue on August 8 and 24, far outperforming the November 8-9 placement at a coupon rate of 7.595 per cent payable up to next February.

The ministry has not said why that bond was placed on the market for a third time in search of unlimited subscriptions, but its proceeds would have helped to cover a Financial Gleaner estimated J$7 billion to J$8 billion of coupon payments due over the period November 14 to 24.

Ian Scarlett from the finance ministry's Debt Management Unit (DMU), said the DMU was satisfied with the funds raised from the recent issue - which was later quantified by the ministry's communications unit as J$5.95 billion. Brian Frazer of Scotia Asset Management concurred that the bond had a reasonable performance.

"Based on the low level of liquidity in the market during the time of that offer, I believe the take-up was reasonable," Frazer told the Financial Gleaner.

Still, the average take-up on the other four VR issues this fiscal year was J$14 billion, compared to less than J$6 billion on the third placement of VR 2022.

Brokers surveyed by the Financial Gleaner say investor interest was muted because of uncertainties regarding the stalled deal with the International Monetary Fund, and whether interest rate policy would change direction; and that the market is cautious about the debts the central government is amassing.

At least J$190 billion of maturities are payable in years 2013 and 2014.

The maturity profile of existing debt between 2016 and 2022 is also now seen as being too "tight", leaving the Government heavily exposed, brokers say. There is at least J$325 billion of maturities within that period, by Financial Gleaner estimate.

For the financial year to date, the Jamaican Government has raised J$72.1 billion from 12 placements, eight of which were reopened bonds, according to finance ministry disclosures on market issues since April 2011.

The majority of the subscriptions, J$59.4 billion, came from five variable-rate bonds; while six fixed-rate bond floats raised just J$12.7 billion.

The noted preference for VR issues comes as interest rates appearing to be stabilising after a period of sustained reductions. Indeed, a 12.875 per cent fixed-rate bond placed in July to mature in 2024 raised just J$465 million; it was reopened in September and fared even worse with an uptake of J$314.5 million.

The ministry said its new floats are being structured to tap into the market shift.

"If you look at the issue in September the market had very little appetite for it," said Scarlett, referring to the mere J$314.5 million take-up, the lowest so far this year.

Frazer and Scarlett say that there is a growing preference for variable-rate investments in recent times because investors expect to benefit from repricings - meaning they expect that interest rates could soon start ticking north.

"Interest rate levels are now very close to the October 2011 annualised inflation of 6.14 per cent," said Frazer.

Scarlett said there are signs in the monthly Treasury bill yields that interest rates have bottomed out.

The T-bill rates were flat in the past two auctions, with yields on all three tenors now huddled within a tight band of 6.22 per cent to 6.28 per cent.

The reset margins on the ministry's 10 VR bonds range between 1.0 per cent and 1.5 per cent.

The yields on variable bonds currently range between 7.34 per cent and 7.935, whereas fixed bonds are yielding 7.0 per cent to 11.95 per cent.

Frazer said the lack of progress on the stalled IMF agreement is creating uncertainty, which in turn could lead to investors demanding higher premiums.

"If left unresolved for any extended time, this may result in a decline in investors' confidence and an upward pressure on interest rates. Amidst this background, it would be prudent at this time to pursue variable-rate securities which will provide some hedge to fixed-income portfolios from decline in asset values, and at this same time offer attractive coupon compensation if rates should increase," the analyst said.

On Wednesday, yet another VR bond, the 2013A which was initially settled on August 3, was reopened for subscription from November 23 to 25. The offer appears to have replaced a planned fixed-rate issue that would have hit the market on November 23.

Indeed, the DMU up to week ago had been weighing whether to switch to a variable-rate offer, "because we have to respond to market and we are trying to raise cash to satisfy government housekeeping expenses," Scarlett said then.

The yields on variable bonds currently range between 7.34 per cent and 7.935 per cent, whereas fixed bonds are yielding 7.0 per cent to 11.95 per cent.

Frazer said investors are unlikely to take up a fixed-rate offer, unless it is of a short tenure and attractively priced above the current indicative yield curve.

The Government has paid out approximately J$39.7 billion to service its domestic debt, according to preliminary Central Government financial data to September 30.

Financial Gleaner calculations show an additional J$9.4 billion interest payments between October 1 and November 24; and that Government's next big round of domestic debt servicing will be in February 2012, when it will pay out as much as J$74 billion - comprising J$45 billion of bond maturities and J$28.9 billion in interest payments.

Asked about the strategy to fund the February payouts, the head of the DMU, Pamela McLaren, said the market would be tapped.

"The Government goes to market every month as part of their financing requirements," she said.

marcella.scarlett@gleanerjm.com