John Mahfood, chief executive officer of Jamaican Teas Limited, says current economic conditions have forced his hand to use debt, rather than equity, to raise monies to fund the company's housing project in St Thomas and refinance higher-cost debt on its books.
On Wednesday, the company released the offer document for a four-year bond aimed at raising J$200 million.
The offer opens for subscription on October 17.
The bond offers a fixed coupon of 8.5 per cent for the first two years. The coupon for the second two years is at a floating rate of 2.5 per cent above the six-month weighted average Treasury bill yield (WATBY).
The bond matures on November 6, 2017.
Mahfood said J$65 million from the proceeds will be used to refinance loans on which the company is currently paying 14 per cent per annum to service a J$44.93-million margin account at Mayberry Investment Limited and a J$18-million overdraft facility at National Commercial Bank Jamaica.
The other J$135-million will be used to acquire Orchid Estate, a partially complete development in Yallahs, St Thomas, which Jam Teas aims to finish.
"The economy is so poor right now and the stock market is not vibrant. You would have thought that because interest rates have been going down the stock market would have been doing better. But that is not what is happening at all," he said.
Jamaican Teas is chiefly in the business of beverages but is looking to grow its real-estate arm. The Yallahs project will be its second development.
The company was the first to announce plans to test the newly launched bond market of the Jamaica Stock Exchange. However, it has now been joined by Access Financial, whose bond offer will debut a week ahead of Jam Teas' and, if successful, will be the first to list a debt instrument.
Mahfood said with the Jamaican Teas stock trading at J$3.95 he believes that the stock is undervalued, and that raising capital by increasing the company's issued shares could be detrimental to the stock.
"In the first place, the stock is currently undervalued and if we were to go to the market issuing more units it would not be good because we would have to do it at a discount, considering the considering the current economic environment. That would hurt us," he said.
"I think that would put our stock in the decline, so we had to find an alternative," he said.
Jamaica Teas went public in July 2010 after successfully selling 29,434,695 units of shares priced at J$3.37 - raising J$83.87 million in the process.
The funds raised were used to expand warehouse space and increase market share through expanded marketing and export.
Jamaica Teas is in the business of importing, packaging, manufacturing and retail of food products. Their mainstay is the packaging of various local and imported teas, under the Caribbean Dreams and Tetley brands. Additionally, the company has interest in three supermarkets, as well as real estate.
The offer document said the notes are callable. They may be redeemed after the expiration of two years for the full principal, along with all accrued interest and unpaid interest, subject to three months written notice to noteholders.
The bond aims to raise more than twice the equity targeted three years ago.
"With the market how it is now, I don't think we would raise the kind of money we would want quite as easily because the stock market is so low," said Mahfood.
"I think ... the raise should be successful because the bond offers benefits to both the issuer and the investor, such as the flexibility with early repayment," he said.
The debt is to be secured by way of a debenture creating a fixed and floating charge over the assets of the company, issued to a trustee on behalf of noteholders.
The lead broker of the offer is Stocks & Securities Limited.