Home' Trinidad and Tobago Guardian : December 19th 2013 Contents BG6 | NEWS
BUSINESS GUARDIAN www.guardian.co.tt DECEMBER 2013 • WEEK THREE
Two well-respected analysts of
Caribbean debt issues have sug-
gested that last week's issue by
Government of a US$550 million
bond on the international capital
market was mispriced and that the country
could have borrowed at significantly lower
Minister of Finance Larry Howai led a road-
show to Los Angeles, New York and Boston
earlier this month to drum up interest by inter-
national institutional investors in a US$500
million, 10-year bond to be issued by Govern-
ment, in its first foray into the international
capital market since 2007.
Citibank served as the Government advisors
on the bond issue.
The US$500 million bond was priced at
4.375 per cent last week Wednesday and
received very strong demand from international
investors, attracting bids of close to US$5 billion,
according to a statement from the Ministry of
Finance on Thursday last.
The strong demand at 4.375 per cent allowed
the Government to increase the offer by US$50
million to US$550 million and "tighten the
interest rate by 0.375 per cent from the initial
rate of 4.75 per cent."
But even the rate of 4.375 per cent on the
US$550 million bond was described by Jason
Julien, the general manager at First Citizens
Investment Services, as being "very generous"
and "a significant premium" when compared
to the TT-government, US dollar yield curve.
Julien pointed out that Government's pre-
viously issued bond, which is due to mature
in 2021, was trading at 2.33 per cent on Friday,
while a 20-year bond that matures in 2027
traded at 3.96 per cent.
This suggests, he said, that the appropriate
rate for a 10-year bond would be 3.55 per cent
and he said he was confident that the US$500
million, if it had been issued on the locally,
would have cleared the market at between 3.7
per cent to 4 per cent, given the yield curve.
Calculations by the Business Guardian indi-
cate that over the 10-year life of the US$550
million bond, the interest payment on at 4.375
per cent would amount to US$240.62 million
(TT$1.5 billion), while the interest payment on
the same bond at 3.55 per cent, which is what
the yield curve indicates it should have been
priced at, would be US$195.25 million ($1.25
The difference between the Citibank rate
and the yield curve rate is about US$45 million
(TT$290 million) over ten years.
In bond trading, the issuer benefits from
paying as low a rate as possible, while the bond
investor is looking for the highest rate possible,
given the lowest risk of default.
Julien said that the extent to which a bond
trades as close to its par value as possible is
a function of the level of liquidity of the security.
He cited as an example Jamaica bond issues,
which are very competitively priced---but at
much higher rates than T&T because Jamaica
is considered a riskier sovereign---because the
north Caribbean country issues frequently and
has many international investors.
Julien said: "Because we have not had to
borrow that much, the international investors
may not have much TT debt in their portfolio.
This accounts for the premium. When you
have many people owning your security, you
have more willing purchasers.
TT better credit, better fundamentals. More
difficult to find investors with TT exposure."
Much cheaper for GOTT to borrow TT$
In October, Nipdec issued a $1 billion, 16
year, fixed rate bond. The bond was guaranteed
by the Government and the proceeds of the
bond are being used to finance the Govern-
ment's programme of road repairs and enhance-
ment called PURE (Programme for the Upgrade
of Road Efficiency). Although the Nipdec bond
had a fixed interest rate coupon of 4 per cent,
because it was oversubscribed, with total bids
received amounting to $1.5 billion, it was issued
with a yield of 3.80 per cent. That means the
Government was able to borrow money from
the local market for 16 years at 57 basis points
(0.57 per cent) less than the 4.375 per cent it
will be required to pay on the 10-year, US$550
In August, the Government issued a $1.0
billion 10-year 2.50 per cent bond, which to
be was undersubscribed primarily due to an
alternative investment product being offered
simultaneously to investors, according to the
Central Bank. The reference to an alternative
investment product was taken to mean that
the local institutional investors who normally
buy Government bonds were more interested
in the First Citizens initial public offer (IPO),
which opened the same week. Still, the Gov-
ernment attracted $559 million for a 10-year
In May, 2013, the Government raised a $1
billion, 7-year 2.60 per cent bond, for which
it received total bids received amounting to
$2.75 billion. Because the bond was so heavily
oversubscribed, the bond offered investors an
issue yield of 1.95 per cent.
The large amount of liquidity in T&T's finan-
cial system has meant that the Government
has not had any issue in financing budget
deficits over the last five years on the local
For fiscal year 2014, Central Government
revenue is estimated at TT$55,040.8 million,
with the major contributor being taxes on
income and profits, estimated at $35,940.7
Expenditures are estimated at $61,397.9 mil-
lion, with 41.2 per cent of expenditures allocated
to Current Transfers, which includes transfers
The deficit for fiscal year 2014 is estimated
at 3.6 per cent. of GDP, or $6,357.1 million, of
which 55.1 per cent is estimated to be funded
through domestic financing and 44.9 per cent
through external financing.
It is clear that all of the $6.3 billion in esti-
mated financing could have been raised on the
local market. GDP for calendar year 2014 is
estimated at TT$176,586.8 million.
Speaking to the Business Guardian on Friday,
Oppenheimer's Carl Ross, who is an expert on
debt issues of Caribbean countries said the
fact that the bond was issued at 4.375 per cent,
but traded on Friday morning at around 4.00
per cent, "would suggest that it was somewhat
mispriced at issue."
Ross said: "At around 4 per cent, non-T&T
investors do not see too much value in the
bond because T&T is being benchmarked
against countries like Peru, Colombia and Mex-
ico, whose bonds trade in a range between 4
per cent and 4.50 per cent.
"If the bond had been issued at 4 per cent,
many of the non-Trinidadian investors would
not have participated. The bond could have
been placed, but without a massive oversub-
Ross added: "Judging by the price action in
the secondary market, some money was left
on the table, in terms of the initial rate of 4.375
per cent. But this was partly as a result of the
'new issue premium,' which occurs with issuers
that are new to market or have not been in
the market for a while."
He said the advantage of T&T issuing a bond
in the international capital market is to maintain
"There is some value in the T&T government
having access to a broader investor base beyond
the domestic shores. By maintaining some
presence in the market, the T&T credit story
remains in global bond portfolios, making
future financings--for the government and
private sector--easier," Ross said.
Questioned on the bond issue, RBC Royal
Bank said: "As RBC was not an official party
to the deal, and out of genuine respect for all
parties concerned thereof, we reserve the right
to not comment on the specifics concerning
the bond issue between the Government of
the Republic of Trinidad and Tobago and
US$550 million bond
'left money on the table'
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