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List JDX bonds on JSE - Williams - vestment banker suggests Government diversify into equities

Published:Friday | January 22, 2010 | 12:00 AM

Chris Williams, investment banker. - file

Cristopher Williams, who is currently transitioning from NCB Capital Markets Limited to Proven Investments Limited, a new investment firm, is suggesting that Government use the opportunity presented by its liability management plan to expand beyond debt as a means of raising capital into equities and quasi-equity.

Williams suggests that once the offer for the Jamaica Debt Exchange (JDX) closes and the transactions are settled, the finance ministry should list the bonds on the Jamaica Stock Exchange (JSE), but that the state should also sell shares in some of the companies it owns through the stock market, create a real estate investment trust (REIT)for properties it owns, and list the REIT on the exchange.

Listing the 24 JDX bonds, he said, would provide "greater transparency in terms of pricing and also the opportunity for better liquidity of the holder of these instruments".

With the proposed debt swap, Williams said at a workshop session on the final day of the 5th JSE Investment and Capital Market conference in Kingston Wednesday, the reduction in the yield curve reduces the risk-free rate of return and, therefore, changes in the mind of an investor the risk-return decision matrix.

The 24 new bonds are being issued at lower rates averaging 12 per cent and longer tenures than the 350 instruments they replace. Inflation is targeted at 9-11 per cent next and lower single digits in the medium term.

"The return is now close to, if not, a negative real return. This is not desirable," said the investment banker.

"They want to beat inflation comfortably. They will be looking now on taking some risk in order to get a better return and this will fuel new interest in the equities market. Both the Government and the private sector need to respond to that decision matrix."

This, he stated, can be done in two ways: one, by looking at some of entities which are well run and provide strong return opportunity, such as the Port Authority of Jamaica.

"They can look to divest through a share issue and, therefore, raise cash to reduce dependence on debt," Williams said.

The Government also has large properties that are "well tenanted" which can be packaged into an REIT, which is a bundling of properties or mortgages into a security that trades on an exchange.

There is already one, the fledgling Kingston Properties Limited (KPREIT), listed on the JSE.

REITs receive special tax considerations and typically offer investors high yields.

Their revenues come principally from their property rentals.

But it is the JDX that offers Government immediate scope to diversify into the equities market, said the investment adviser.

The offer closes January 26 and the trades due for settlement two weeks later on February 16.

There is now an opportunity, Williams told the conference, to respond to the demand of investors for higher yields.

"The intermediation business model is going to be hard to justify because of a reduced spread caused by the JDX. The investor will want more and issuers will be paying less," he said.

"The stock exchange is also a securities exchange. We want to see more of this being offered."

A series of regional bonds is currently listed on the JSE, but none currently trade.