Aug 2016 Financial News

Government launches Eurobond tender offer to buy US$1.144 billion of existing bonds (Jamaica)

Aug 10, 2016

Yesterday morning, the Government of Jamaica announced a tender offer for its 2017 and 2019 Eurobonds, meaning that it would purchase its already existing outstanding bonds for cash.

Specifically, the first offer is for the 2017 Eurobond maturing on June 20th, with outstanding principal of US $400,071,000, at a price of 108 per cent, or an 8.0 per cent premium on the principal value.

The second offer, for the amortising notes due 2019, is for a total principal of US$744,212,000, at a purchase price of 110.5 per cent — a 10.5 per cent premium above the principal value.

At two days, the tender period is very short, ending at 2:00 pm tomorrow, although this can be extended. The settlement period for the offer is currently Friday, August 19th.

The dealer managers of the offer are two global investment banks, Citigroup Global Markets and Merrill Lynch, with Citigroup also acting as the “billing and delivering bank” with overall responsibility to consolidate and accept the notes on the instruction of the Government.

The overall offer does not require any minimum level of participation by investors, but is subject to “the pricing and closing of an international capital markets transaction on the long dated part of the curve in an amount acceptable to Jamaica, to be priced on or about three days after the date hereof”.

What this appears to mean is that Jamaica plans to shortly (possibly this week) sell one or more of the longer held Eurobonds in the international capital markets to finance the tender, possibly including reopening the recently issued 2045 (a 30 year bond issued last year), to take advantage of the current global search for yield.

Sean Newman, a Jamaican working in emerging markets at large US fund manager Invesco, in an email response to the Jamaica Observer, said: “T he timing of the Jamaica deal is attractive. In addition to the positive reform momentum the country has earned through adherence to IMF targets, the technicals in the global bond markets are strong, with 55 per cent of the bonds in the US$4.7 trillion Barclays Aggregate bond index now yielding less than 1 per cent. The Government is being very opportunistic, addressing its refinancing needs by monetising the goodwill from its adherence to the IMF programme to term out existing maturities. Looking ahead, investors are going to pay close attention to the public sector wage bill and growth prospects as the sovereign seeks to deleverage. “According to US investment bank Jefferies, Jamaica’s 2017 Eurobond trades between 106 and 107.25 (bid offer price spread), or a yield to maturity of between 3.437 per cent and 2.03 per cent (bid and offer yield respectively).

Jamaica’s 2019 Eurobond trades between 107.875 and 109.125 (bid offer price spread), or a yield to maturity of between 3.571 per cent and 2.91 per cent (bid and offer yield respectively).

Meanwhile, Jamaica’s 2045 Eurobond trades at between 114.25 and 115.65 (bid offer price spread), or a yield to maturity of between 6.594 per cent and 6.18 per cent (bid and offer yield respectively). The middle of the latter range is only about 4 per cent above current US Government 3-year treasuries of 2.3 per cent, which is itself only 0.71 per cent above current US 10-year treasuries at 1.59 per cent — suggesting that refinancing at this price would be a smart option.

JMMB’s Julian Mair, one of Jamaica’s most experienced bond market participants, told the Business Observer: “We view this transaction as being well timed by the Ministry of Finance, as it extracts the benefit of record-low rates of financing for Jamaica in the International Debt Capital Markets. Brexit has been a blessing in disguise for Jamaican debt, as it has allowed Jamaica to reduce the refinancing risk associated with the short average duration of Jamaica’s debt profile. As more information is provided on the New Note Issuance mentioned in the tender offer, we will have the opportunity to evaluate the net benefit of this transaction to the country”.

Jamaica’s Eurobond king, top Caribbean debt trader Gregory Fisher, formerly of Bear Stearns and Oppenheimer, has traded billions in Jamaican debt alone in his more than 20-year career in the region. Now at US investment bank Jefferies, Fisher, when asked to comment on the deal, responded only “No comment”.

It is worth noting, however, that there had been whispers in the marketplace over the past few months that such a transaction was being worked on, with the advice of an international player, and several local analysts had also previously argued privately that such a transaction would make sense, as it would essentially eliminate much of Jamaica’s financing risk for most of the new Government’s term.

Indeed, there was strong suspicion among some market participants that the recent two “non deal” road shows to the US and Europe would eventually lead to a deal, and both major rating agencies have very recently visited Jamaica to review our economy.

The bottom line is that financing conditions currently appear excellent to get the deal done.

Jamaica’s 30-year bonds are now yielding only slightly above 6.0 per cent — which not long ago was the yield on the country’s 10-year bonds — presenting an excellent opportunity to remove the refinancing risk of the 2017 and 2019 Eurobonds far into the future.

The deal has the additional benefit of strengthening Jamaica’s hand in any new negotiation with the IMF, scheduled to begin next week, particularly if Jamaica succeeds in raising additional money to pre-finance most of the remaining requirements for the 2016 and 2017 fiscal years.

In short, if the deal is successful, then Jamaica will have the potential to create a true virtuous “refinancing” circle, holding the handle rather than the blade as it seeks cheaper financing costs over the life of the new Government.

 

Source:
BY KEITH COLLISTER
Jamaica Observer
Wednesday August 10, 2016

http://www.jamaicaobserver.com/business/Government-launches-Eurobond-tender-offer-to-buy-US-1-144-billion-of-existing-bonds_70094