BOJ revives financial rescue fund under JDX2
Steven Jackson, Business Reporter
The Bank of Jamaica will revive the massive support fund initiated two years ago to stabilise financial firms that might falter under the weight of the debt exchange programme, but has said the funding mechanism will be different.
Central bank support will be repo-based, BOJ Governor Brian Wynter said Tuesday.
Standard & Poor's (S&P) immediately downgraded Jamaica's credit rating as details of the new National Debt Exchange, the NDX, were being released. (see story on Page C3).
The NDX, which will restructure J$860 billion of bond debt, is already being referred to alternatively as JDX2. The offer closes next week on February 21.
The initial debt exchange restructured J$702 billion of debt, with 99 per cent participation from holders of GOJ bonds.
"Our technical team has reviewed the debt exchange offer in detail and has run various stress tests that assure us that the temporary impact on financial institutions' profitability and capital adequacy will be manageable," said Wynter.
"Nonetheless, in order to ensure financial stability, the Government has revived the Financial System Support Fund (FSSF), which will be administered by the Financial Regulatory Council on behalf of the minister of finance," he said.
Gary Peart, president of the Jamaica Securities Dealers Association, said he would not comment on FSSF 2 until the details of its structure have been reviewed.
The initial rescue fund amounting to US$950 million was unused under JDX. The FSSF proceeds were subsequently transferred to BOJ to boost the country's reserves.
The NDX does not force a haircut on investors, but it offers it as an option. The so-called FRAN offer — Fixed Rate Accreting Notes — pays J$80 on every J$100 held by the investor, but the offer is structured so that the bonds will regain full value over time.
FRAN is a 15-year offer at 10 per cent coupon. The bond principal starts 'accreting' or regaining face value in August 2015.
J$17 billion a year savings
Under NDX, Government aims to save J$17 billion in annual payments from cutting interest on domestic bonds.
External global bonds mainly held by foreign institutions remain untouched.
Dr Carl Ross from US-based Oppenheimer views the Jamaica Debt Exchange sequel as positive, adding that any possible rating downgrade will have little effect on investments.
"From the standpoint of the external world it is a positive thing. The Government is basically saying that the external debt is senior to the domestic debt," said Ross, managing director of investments at Oppenheimer & Company. "I think the external guys are breathing a sigh of relief."
The views of Oppenheimer have weight locally as Jamaican firms use Oppenheimer's 'morning letter' as an unofficial benchmark to price their competing bonds.
"I think they are seeing that the Government considers the external guys' claim as more senior than the domestic guys' claims," he said.
The S&P downgrade came less than 24 hours after the NDX was announced in a televised broadcast. Ross said that any rating downgrade will do little to dissuade investors "because Jamaica's rating is so low that any downgrade really doesn't matter".
Last month, Gregory Fisher, managing director of overall operations at Oppenheimer, told the annual Jamaica Stock Exchange capital markets conference, which Oppenheimer sponsors, that the debt dynamics of Jamaica resembled Japan more than Greece.
Ross yesterday sought to contextualise his colleague's views, explaining that similarities exist on both sides.
"Jamaica has a lot of similarities with both Greece and Japan," he said, then added. "But really, the debt is way too high and the Government is trying to take steps to reduce it. The JDX I was not enough and now that is why they are doing a JDX II."
All three nations are among the world's most indebted but Fisher reasoned that Japan has more similarities, including lost decades of growth.
IMF-published estimates of the three countries' debt to GDP ratios places Jamaica at about 139 per cent for 2011-12; Greece at a projected 158 per cent; and Japan at 230 per cent.
"The [NDX] programme needs to generate private sector optimism and dynamism. The private sector will have to lick their wounds ... hopefully, it will lead to a virtuous circle (Government and private sector) that will lead to growth," Ross said.
Essential step in IMF deal
The NDX aims to shave 8.5 per cent off the debt to GDP ratio by 2020, while saving Jamaica 1.25 per cent of GDP in debt servicing costs annually.
"This transaction is a critical part of the Government's economic programme and is an essential step in finalising an agreement with the International Monetary Fund (IMF)," said the Ministry of Finance.
Under the pricing terms for the New Benchmark Bonds issued by the Finance Ministry on Tuesday, the debt exchange will replace GOJ bonds with 25 new issues that will mature between 2018 and 2050.
The coupons on the fixed rate bonds have been cut by one to five points, while the reset margins on the variable bonds have been reduced from a range of 1.0 to 1.5 per cent to a range of 0.25 to 0.5 per cent.
Under JDX, returns were cut by an average of 6 percentage points. The initiative ended up slamming the investment income but was not as impactful on profits of large financial institutions.
The largest banking group, National Commercial Bank Jamaica, for example, made a record J$13.88 billion in net profit in 2011. NCB, the bank, holds approximately 70 billion of GOJ securities, according to central bank data; Scotiabank Jamaica holds J$28 billion; while the largest building society, Jamaica National, holds US$20 billion.
The largest insurance group, Sagicor Life Jamaica, held an estimated J$121 billion of financial securities but the portion held in GOJ bonds was not known.
For institutions seeking support under the NDX, the BOJ says they can borrow up to 100 per cent of pledged NDX bonds.
"Financial institutions regulated by the bank as well as those not regulated by the bank will be able to participate in the facility as long as they participated in the NDX," Wynter said on Tuesday.
The Financial Services Commission will meet Friday with pension and insurance industry representatives to explore the implications of the NDX.