Calling Dennis Jones… Barbados borrows another $200 million.
A long time BFP reader sent us the following little news item and we aren’t financially sophisticated enough to say much about it, except to note that the sale of the Barbados notes was a “private placement” and the yield is 7.2 percent, which seems a tad high to us for this type of thing.
So Barbados just borrowed another $200 million (US?) dollars at 7% or thereabouts (plus commission?).
Is our resident economist Dennis Jones still around? His latest article (published yesterday) is about the state of our foreign reserves.
Dennis, can you comment on this transaction please?
Thanks!
Here is the Reuters article…
New Issue – Barbados sells $200 million notes
July 27 (Reuters) – Barbados on Tuesday sold $200 million of 12-year notes in the 144a private placement market, said IFR, a Thomson Reuters service. Deutsche Bank was the sole bookrunning manager for the sale.
BORROWER: BARBADOS
AMT $200 MLN COUPON 7.00 PCT MATURITY 8/4/2022
TYPE NTS ISS PRICE 98.411 FIRST PAY 2/4/2011
MOODY’S Baa3 YIELD 7.20 PCT SETTLEMENT 8/4/2010
S&P TRIPLE-B SPREAD 416 BPS PAY FREQ SEMI-ANNUAL
FITCH N/A MORE THAN TREAS NON-CALLABLE
Barbados Free Press 
Good article
We have no idea if this money is just revolving or used to pay off interest and/or principal of other international debt already borrowed. Was this money guaranteed and by whom. What was the fee for this high rate loan and who actually received it?
As Dennis Jones points out we also have no idea of the total incomings and outgoings of Barbados debt and more importantly where money is spent internally and for what?
This can only be solved by an accountable and transparent leadership which starts with full disclosure of how bad it is.
Since there has been complete silence on Gems, Dodds, Clico and other similar matters, this disclosure is not coming
from those who are and have been in power.
Sooner rather than later people will have to be paid for actually doing or creating something rather tha holding a position.
I would expect that this is to refinance the $200mm bridging loan that was arranged some months ago when it was not a good time to issue longer term debt. This was covered in the press recently around Gov. Worrell’s presentation on the state of the economy.
The term ‘private placement’ is a reflection of the way in which the debt was issued. Instead of registering the debt was the US SEC or with other regulatory agencies around the world for sale as a general public offering. A private placement is a cheaper, more efficient way to issue debt when it is being sold directly to primarily institutional investors or other qualifying (or sophisticated) investors that don’t require the extra disclosure of a full public offering to adequatly evaluate the creditworthiness of the debt.
It is a 12 year bond, and if that info is correct about being issued with a yield of 7.2%, it was issued at a spread of around 4% to US Treasuries. This is one way to consider the risk associated with the debt. As an investor you could put your money with the US Government, considered by most to be the safest of investments, and you would get around 3.2% for a 12 year bond. The extra 4% that investors require from Barbados reflects the additional compensation to cover the additional risk of default.
Barbados’ credit risk rating is BBB at S&P and Bbb3 at Moody’s. US corporate BBB issuers are currently paying average spreads of around 2.6% in 10 to 15 year maturities, so the market seems to consider Barbados a lower quality credit relative to these issuers – this is reflected in Moody’s rating of Bbb3 which would be the lowest BBB rating of that agency.
Other thing to note, this bond will mature in August 2022 and we will have to repay, or refinance it with a new bond issue at that time. Unfortunately there is also a $150mm bond maturing in December 2021. So we’ll have a lot of refinancing to do in those 8 months. Hopefully it will not be a disadvantageous time to do this.
I did a bit more research and, according to the Merrill Lynch bond indices, investors demand a 3.6% spread over US Treasuries for Barbados sovereign debt.
The new bond BARBAD 7 08/04/22 is currently trading in the secondary market at a spread of around 3.9% so it has narrowed since issue. i.e. it is trading at a lower rate. This is fairly common that a new issue comes at concessionary rates to where other existing bonds currently trade. This help to get the deal done in the shortest time period.
The other bond (150mm of BARBAD 7.25 12/15/21) seems to be currently trading at a spread of 3.3%. Still more narrow than the new bond and much narrower that where it issued.
I don’t deal much in emerging market debt so I am not too sure if this level of concession on a new issue is typical. But overall the bond markets are concerned about soveriegn risk around the world and Barbados is one of those countries that has a high level of debt. We’re not as bad off as places like Greece and Spain, but in my opinion we are getting closer to untenable levels.
“X” has explained it clearly and concisely.
The yield on a bond represents its risk: the higher the risk the higher the yield. If we run our affairs badly and it is perceived to be risky to lend to us by buying our bonds, we have to pay a higher interest rate.
The difference in yield between a 12 year Barbados Government bond issue and a 12 year US Government bond issue represents the difference in the credit and liquidity risk. Given that liquidity risks are assumed not to change much, the higher the yield difference, the more our credit risk has worsened relative to the US credit risk.
It seems that over the past couple of years this yield difference has risen to 4% from 3%. Our worsening credit risk has added 1% to our interest costs from our credit standing in 2008. If our credit rating has fallen to the lowest “investment grade” rating. Many, if not most, institutional investors are not permitted by their investment rules to by bonds of issuers who are below “investment grade” and so if we were to be downgraded again, our interest costs would jump higher in bigger steps.
A country’s credit rating is considered a rating ceiling on all entities within the country. Consequently, if we are downgraded, then the credit rating of a well run company in Barbados that has little debt and never missed an interest bill would also be downgraded.
Under international banking rules that we are trying to sign up to, banks will have to set aside a larger amount of capital against loans to weak credits, and so a downgrade will affect us all.
The reasons why our credit standing has weakened are that the level of debt is high and has risen sharply. Under the new GDP revisions, debt levels rose from 77.8% of GDP at end 2007, which would be considered on the high end of sustainable, to 97.2% in June 2010.
Moreover, the Government current account shows a persistent deficit for the first time. It is a prudent policy – sometimes called the “Golden Rule” for a Government to meet its current expenditures (expenditures less interest payments, redemptions and capital expenditure and investment) through its current revenues (tax revenues less one off sales of buildings or assets). Throughout the years of our independence we have always hit the Golden Rule over any six month period. For the first time we are flouting this rule. We are now borrowing to pay for current expenditure. In essence we are borrowing just to get by, not for any new investment that might bring a social return like a new road, new pipes, new hospital etc, but just to pay wages and salaries.
This leaves us two choices: higher taxes or cutting expenditure. Higher taxes would worsen our high-cost economy, making us less competitive and cutting expenditure could endanger jobs. The first thing to do then would be to cut waste. If the Government was able to cut just 10% off its annual $2.9bn expenditure it would dramatically improve its fiscal fortunes. Who would argue that there is not 10% waste in Government expenditure? And that belt tightening and improving fundamental efficiencies could not save 10%?
It is my bet that the Government will chose the easiest option which is to raise levies and charges that most people think that other people pay and hope that people will not notice a higher VAT. We need to stop the fundamental rot, and make some tough decisions on delivering public services more efficiently than we do today. Who will bite that bullet?
Another $200 million loan. That makes about $2.5 billion BDS since 2008 & counting!!
Conrad has a good long term solution even though government inefficiencies far exceed 10%.
Inevitably, the elected politicians will fail to make the right decisions for short term gain.
Incompetency reigns supreme and integrity is nowhere to be seen.
Just check the call in program Brasstacks,,,,
There are questions ,,,,,,,,,,,,,,,,,Like today a person of between 25 and 30 insuiated that persons of that same age group really did not understand the reason why the world (and Barbados) were in A state of “Economical Recession”………….
Then again Hmmmmm,,,,,,maybe there is something there….,,,,Some say,Reccession,,,??? What Reccession??????..When one observes the buying habits,,per say Pricesmart,,,Observe closely the contents of an overloaded cart,,,,,,,,,,as it slowly manoeuvres around the similarly overloaded carts with boxes of nonessential items,,,Froot loops,,,,Sweets,,,,Super sugarcoated Carbohydrates,,,,,,,,Cookies,,,,,,,,,Canned Goods,,,,,,,,,,,Plastic Bottled Juices,,,,,,,,,and I am sure you all know of what else etc.,etc.,etc.,…WHAT IS THIS ALL ABOUT?????
The Economy!!!!!!!!Thats What!!!
REFLECT ON WHAT YOU NEED,,,,,NOT WHAT YOU WANT…………….
Concerns the true state of the Economy…
Neither I nor you or the remainding 280,000 Barbadians will be privy to that Million Dollar Question.There is absolutely no Govt in this world that in a state of a negative financial predicament would reveal its true state concerning futuristic economical outcome…………….
The key is tapping into all that cash that in those banks in town and finding a way for them to help boost the Private Enterprise Growth expansion and Consumer Spending and or Investment .
The Central has lower it rates.but yet these bank here holding all we money as saving but only lender to those who got the sure goods that they can take back
why can’t they just set a side in they annual Budget a dollar figure to target private Enterprise Growth Loans
This DLP Government just out of Ideas and caught up in old Socialists ideas via its subsides to non productive programmes like free bus fare and summer champs
I got plenty of ideas but I just anit brother to give then out any more
WHY?
Because I come to realize That this Current Population Just an’it Checking
They only take Interests just before they realize some element that is apart of they world , which is of some significant to them or to them self
personally is about to get touch
So the people parting and spending like there is no recession
All the Happenings and Explanations and downward trends in our economy will only appeal to them
when they boss walk in to they work place area and make that dread announcement
Folks , we being having Some Problems with our financing Commitments to creditors , cash collection and there been some break-Even Challenges of late
Thus to reduce the cost of Operations We will either have to Cut Salaries and wages or Cut staff
and Thus some Decision has be Made
That when The wake calls Arrives
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