Jan 2010 Financial News
JDX will result in short-term losses for some institutions
Jan 29, 2010
THOUGH the financial sector has come out in strong support of the Government's Jamaica Debt Exchange (JDX) programme, many will report losses as a result, some significant.
Minister of Finance, Audley Shaw on Wednesday announced a 91 per cent participation from bondholders to the debt exchange, which would see holders of Government of Jamaica (GOJ) bonds returning the high interest earning instruments for bonds with lower yields and longer maturities. However, many banks and other financial institutions earn a significant portion of their income from interest on these bonds. The exchange is expected to see a reduction in the earnings from net interest income as a result.
Ian McNaughton, general manager, Barita Investments, told Caribbean Business Report that the stock brokerage and investment firm is "100 per cent in support" of the JDX even though it will negatively affect the institution's bottom line.
"It will affect us significantly. 70 per cent of our income is from fixed income securities. This will represent a significant cut in the interest rates earning capacity of the organisation from that source. It is going to impact our bottom line significantly," McNaughton said.
So significantly in fact that the losses will be in the "millions of dollars" according to McNaughton. He, however, stressed that Barita's capital base remains solid despite the losses that will inevitably result.
"We don't see any issues with our solvency and liquidity but in the short term, until we can shore up our interest rate earnings, we are going to be hit hard," he added.
Some of the institution's clients have not been as understanding of the JDX however. McNaughton said Barita had to convince some persons of its importance to the overall health of the economy. "The support has been reasonably good, but I don't have all the information so I couldn't say whether it's 100 per cent," McNaughton said Tuesday.
"Because of the situation we have found ourselves in and because we have an interest rate issue, there was very little room for us not to implement a programme like this," he said.
The Government has extended the deadline for participation in the JDX until Wednesday, February 3 in the hope that there will be 100 per cent participation from bondholders. The move is expected to save the Government more than $30 billion in interest payments.
RBTT Securities Limited has not reported how the exchange will affect it.
"We are still analysing all the implications of the programme, and are unable to conclusively communicate the extent of the impact on our balance sheet at this time," Minna Israel, president and country head, RBTT Bank Jamaica Limited, said in an e-mailed response to Caribbean Business Report questions.
However, Ian Kelly, Senior VP, Asset Management and Advisory Services, First Global Financial Services (FGFS) told Caribbean Business Report that the institution is fully exposed as a result of the JDX, even while affirming his commitment to the initiative.
"As a securities dealer that is regulated by the FSC, we are in the repo business. One hundred per cent of our assets are in government of Jamaica bonds. Fortunately we have been able to do a split between Jamaica and the US (bonds), and even the US component, 65 per cent is in global and other corporate paper. That has helped us to have some cushion on the US dollar side, but on the Jamaica dollar side we are fully exposed.There will be some impact. We are still in the process of doing our models," said the First Global executive.
Despite this fact however, Kelly said the institution and the entire GraceKennedy group, of which it is a part supports the JDX.
"We believe in Jamaica. The Grace group has fully endorsed this initiative. We have actually put our other business on hold to deal with the JDX," Kelly disclosed. As a result, FGFS recorded a participation rate of 75 per cent of its clients on Friday, ahead of the initial Wednesday, January 27 deadline.
"FGFS is the only institution in Jamaica that has, upon understanding of the debt exchange, had several seminars in Kingston with all our clients and one to one discussions with other clients. As of last Friday we had a very positive success rate," Kelly said. He added that he expected more than 90 per cent participation from FGFS GOJ bondholders by the deadline.
However, not all institutions are reporting a level of exposure that would significantly affect earnings. Gary Peart, CEO of Mayberry Investments Limited, said the firm's exposure to the losses is limited because of contingencies that were taken up to four years ago by management.
"When we listed we indicated that we were looking to reduce our exposure to net interest income," Peart told CBR. "Net interest Income accounts for 30 per cent of our overall income and even in that 30 per cent the impact is relatively low. "At 30 per cent, net interest income is a relatively small portion of out total income."
Peart said the JDX will create other trading opportunities for Mayberry which will result in increased earnings. "Mayberry has always recognised that it is a securities dealer. In keeping with FSC requirements, more than 50 per cent of your income should come from dealing activities. Where the market is going is Mayberry's strength, which is dealing, equities and bond placement," said Peart.
Capital & Credit
Michelle Wilson-Reynolds, senior vice-president, group marketing & corporate affairs, Capital and Credit Securities, is also reporting the possibility of income gains as a result of the JDX.
"It will have a positive impact on our fair value capital and overall income accounts. Based on projections and where we had capped our budget and income and expenditure, our analysis shows us that this is not going to affect us negatively at all. But whether or not it would have affected us, we are committed to it 100 per cent."
Wilson-Reynolds said the reduction in interest rates will lead to a reduction in overall costs associated with the operations of the entity, which will inevitably result in better earnings.
Yesterday, Brian Wynter, governor of the Bank of Jamaica, said the response of the financial sector to the debt exchange programme was remarkable. He lauded the institutions at the Rotary Club of Kingston's weekly luncheon and said that the successful exchange would result in better opportunities for all.
"Ultimately... the programme and supporting policy reform are intended to fundamentally transform the Jamaican economy and create the conditions for strong and sustained growth," Wynter said.
From all indications, financial sector bosses are confident that the measure will be successful. Said Mayberry's Peart: "If most companies are like us, getting 95 per cent of our clients accepting the JDX, if that's the case across most financial institutions then we expect it (JDX) to be successful."
Friday, January 29, 2010