Aug 2015 Financial News

Why is Sagicor paying 8.875% and TCL 6.25%?

Aug 24, 2015

The Sunday BG asked Sagicor Financial’s president Dodridge Miller why was the company paying a higher rate on its US$320 million bond than TCL on its US$210 million facility, given the fact that TCL defaulted on its indebtedness last August.

Miller said the B credit rating that the international rating agencies, S&P and Fitch, had given to Sagicor “was a significant determinant in pricing of the bonds.” (When TCL floated its bond, it was rated CCC by S&P and was upgraded to B- last week).

He said the size of the Sagicor bond at US$320 million and the fact that it is senior unsecured, with no payment on principal until maturity, but callable within four years, also contributed to the high interest rate.

He said that Sagicor, being a dominant Caribbean service provider, has a not insignificant exposure to lower rated sovereigns including Jamaica rated B and Barbados rated B-.

Asked to explain the difference between the Sagicor rate that is fixed at 8.875 per cent and the TCL rate that is floating but starts at 6.25 per cent, Miller said: “Let me reiterate that I have not been focusing on the TCL refinancing and I confess to knowing very little about its performance.”

He said his comments were therefore limited to the following which, for the most part, were in the public domain:

• TCL appeared to have raised US $210 m through the syndication of a 5 year amortizing loan;

• The loan was narrowly distributed among 10 carefully selected banks, and was sourced through a combination of US $ and TT $ tranches;

• The rate was therefore linked to both Libor and TT treasury.

• The loan is senior to all other debts and is secured by operating subsidiaries;

• The loan appears to have a 30 per cent bullet payment at maturity, resulting in a close to 3.5 year average life;

• The loan was raised after significant internal restructuring, including a haircut on existing debt and a new equity issue to improve the financial condition;

• Increased equity participation by Cemex, (from 20 to 39 per cent), a Mexico-based international company which significantly enhanced TCL’s bankability;

He said, however, that the Sagicor and TCL situations are not comparable because:

• The TCL issue was supported by its international controlling shareholder Cemex, and was likely priced off the strength of Cemex, while the Sagicor credit stands on its own as a Caribbean based public company.

• The TCL issue was a combination of US dollar and TT dollar funding, while Sagicor was US$320 million, all in US dollars, and was probably the largest by a Caribbean private sector company.

• The TCL loan was narrowly marketed to a select group of 10 banks. Sagicor was widely marketed to international and Caribbean investors.

• The TCL loan is amortising and effectively short-term, approximately 3.5 years. The Sagicor loan is long-term at 7 years, with a bullet payment at maturity.

• The TCL loan is fully secured by its operating subsidiaries, the Sagicor loan is unsecured.

Asked whether Sagicor would have been better off waiting rather than going to market when it did, Miller said several factors influenced the financial institution’s timing:

• The existing loans and the Convertible preference shares were due within 12 months.

• It was very likely that interest rates would be higher later.

• There was no guarantee that Barbados would not have a further negative rating action, which would have a negative impact on Sagicor.

• The closer we got to May 2016, the greater the execution risk, and the greater the possibility that S&P would place the rating on “Rating Watch” which again could negatively impact the marketing of the bond.

• The process towards engaging the international capital markets is lengthy and involved one and generally consumes a lot of management time.

Any delay in the process could conflict with other significant projects such as year end audits and other regulatory requirements.

On the issue of the proposal by Sagicor to redomicile its parent company to an investment-grade location—which would automatically have an impact on the interest rate that the company pays on its bonds—Miller said: “Our assessment of the time to complete the process of redomiciliation, and to achieve the improved rating could bring us much too close to the May 2016 maturity of the existing bonds.

“We did not think it appropriate to take that risk.

“We did the next best thing, by securing the refinancing, with the option to recalibrate again in four years, after the benefits of re-domiciliation have been reaped.”

 

Source:
Sunday Business Guardian, SBG3 and SBG5
Sunday August 23, 2015