CARIBBEAN BOND ISSUANCE – Do Investors Come Out On Top, Or Taper – Escape For Issuers?

9 December 2013


With a financially troubled Eastern Caribbean, and a scarcity of new deals, this December may be one to savour. Both the Bahamas (BAHAMA) and Trinidad & Tobago (TRITOB) are set to issue USD-denominated Eurobonds. On the back of Barbados’ scrapped tender and new deal, it is safe to say that institutions should be much keener on both these sovereign issuers. I want to focus on the TRITOB in particular, not as a matter of national pride, but due to the relatively heavier demand I expect in the name.

With the 10-year US Treasury rates in the 2.60%- 3.00% band, and expected to rise further in 2014 due to tapering, now might be considered a decent time to issue paper. I would say in hindsight, however, that 2012 would’ve been a much better year to come to market in terms of accessing cheaper USD from a rate perspective (10-year UST yield was ~1.60% a year ago!), and relative stability of markets. At any rate, that’s behind us now, and we are certainly looking forward to this benchmark (USD 500mm) deal.

BACKGROUND

T&T Guardian

“T&T is issuing the bond although it has more than US$9.4 billion in official foreign reserves and US$5 billion in the Heritage and Stabilisation Fund. A possible explanation could be that the Central Bank is concerned about the rate of depletion of T&T’s foreign reserves. However, the Central Bank referred all questions on the bonds to the Ministry of Finance and the Economy.” 

IMF 2013 Article IV Consultation with Trinidad & Tobago – Press Release Highlights

Unemployment is low at about 5 percent, but underemployment remains significant.”

“The CBTT continues to mop up considerable excess liquidity via voluntary term deposits by commercial banks and a recent TT$1 billion government bond.”

“The staff projects real gross domestic product (GDP) growth of some 1.5 percent in 2013, with risks slightly to the downside, should development spending be under-executed.”

CBTT Monetary Policy Announcement (Nov. 2013)

“… during the period November 1 – 22, 2013… excess reserves averaging $7.8 billion daily.”

“The TT/US 10-year treasury bond differential fell further to -29 basis points in November 2013 from -20 basis points in October 2013.”

Excess liquidity is very much the recurring theme throughout those blurbs. In terms of USD liquidity, however, why has it taken so long for a new issue to come to market? The T&T Guardian speaks to September 2012 being the last ‘due date’ for an issue, but for many of you this was all too familiar prose.

Pricing

Given that there are only 2 existing TRITOBs I’ve added NGCTT as a T&T sovereign proxy and BERMUD (most recent issuer in the region) to round out my regional benchmarks.

 

 

 

Source: Bloomberg

Source: Bloomberg

So far we’ve heard speculation that the issue is likely to have a 20 year tenor or it may be divided into 10-year and 30-year tranches with the lion’s share placed locally. Personally, I like the dual tranche hypothesis better, as buyers of different parts of the curve can be somewhat satisfied. The new deal does provide more liquidity in the name, but the ‘TRITOB dynamic’ of more buyers than sellers is unlikely to change significantly – USD 500mm will be easily swallowed up. In other words, we won’t advise that you dump holdings in the existing issues ad nauseum in order to gain exposure to the shiny, spankin’ new one. Oversubscription will be a major factor to cater for when placing orders, as the usual suspects (yourselves) are expected to heavily participate. This includes:

– National Insurance/ Social Security Boards

– Insurance companies

– Pension funds

– Mutual funds

– Banks

– High Net Worth Investors

Trying to gauge the 10-year and 30-year pricing is a bit tricky, given how TRITOB trades. The issuer’s (GOTT’s) prerogative is to seek out the best financing deal for themselves. So although BERMUD 24s (rated AA-) trade at 217bps spread to UST, it is very difficult to envisage such a 10-year TRITOB with a high 4%/low 5% handle. This is brought into even clearer focus when we look at the TRITOB 27s at a 4.21% yield currently. These do not trade like regional counterparts! I would say Chile offers a much better benchmark and TRITOB currently trades just inside of that as well. Smaller TRITOB issue sizes and the proportion of local holdings to total issue size, play a part there.

So, a lot to speculate on with very little help from the existing regional issues, but we’re taking a crack at it.

Firstline Securities’ Mock TRITOB Term Sheet

Issuer: Government of the Republic of Trinidad & Tobago

Ratings: Baa1/ A (Moody’s/ S&P)

Tenor: 10yr/ 30yr

Initial Pricing Thoughts (IPTs): UST + 80bps/ UST+ 100bps

(~3.67% /4.90% yield)

Size: 500mm total

Exchange: Luxembourg

Bookrunner: Citi (sole)

Mininum Piece/ Increment: 100,000/ 1,000


This is our best guess for now, and I would say pricing is likely to tighten rather than widen given the expected demand. What we can definitely state is that we will be involved in a number of ways; trading the existing isses, taking orders for the new deal, and trading it on the secondary.

As usual once we get firmer details, so will you!

For more information, facts and figures about the market, or to ask any questions contact us at: 1 868 628 1175 or email us at info@nullfirstlinesecurities.com.

Gerard Stephens

Account Executive

Sales and Trading

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