Nov 2009 Financial News

Downgrade sends GOJ bond prices spiralling downward, again

Nov 11, 2009

Government of Jamaica (GOJ) global bond prices have dipped over the week since Standards and Poors (S&P) downgraded Jamaica's debt, but the local financial sector should fare far better than in late 2008, when downward spiralling bond prices and subsequent margin calls sent domestic firms scrambling to find some US$300 million to meet margin calls.

The upshot then being a runaway Jamaican dollar that depreciated against the US dollar by 22 per cent between September 2008 and February this year.

Now, even while financial institutions are using some amount of leveraging to hold the GOJ bonds, most of their exposure to Jamaican Government debt that is traded in the US market is fully owned by the local firms, according to financial sector sources.

After finding large sums of hard currency to meet margin calls last year and essentially removing a substantial portion of the leverage used to purchase the bonds, domestic firms didn't go back into a high leverage position.

Between last week's downgrade by S&P, from B- to CCC+ for Jamaica's long-term foreign and local currency debt and Monday, GOJ bond prices dropped by one to 18 per cent - depending on the instrument.

According to the Jamaica Stock Exchange (JSE) bond indices report, prices fell from one to six per cent for five of the ten traded bonds, which government issued to raise in excess of US$1.3 billion.

But the other five bonds - with total face value of US$1.8 billion - saw prices drop by eight to 18 per cent, a range that would likely have pushed the net value of some bonds below the margin requirements of banks.

Margin buying is buying securities, and in this case GOJ bonds, with cash borrowed from a broker, using other securities as collateral. The securities serve as collateral for the loan. The net value, which is the difference between the value of the securities and the loan, is initially equal to the amount of one's own cash used. This difference has to stay above a minimum margin requirement.

A similar thing happened in August when S&P had downgraded Jamaica from B to B-.

But then price declines weren't as precipitous, having stopped at 14 per cent before returning to pre- August levels.


Source:
Jamaica Observer
Wednesday, November 11, 2009

http://www.jamaicaobserver.com/magazines/Business/html/20091110T210000-0500_163571_OBS_DOWNGRADE_SENDS_GOJ_BOND_PRICES_SPIRALLING_DOWNWARD__AGAIN_.asp