THINKING OF INVESTING IN THE NIF IPO? HERE ARE FIRSTLINE’S 10 THINGS TO KNOW BEFORE YOU DO
Hi everyone!
It’s IPO time again in T&T! The government-owned National Investment Fund Holding Company Limited (NIFHL) is offering TTD 4 billion of bullet bonds to the market in three series. There is no substitute for reading the prospectus and look out later on this week for more in depth analysis from Firstline, but right now, here are 10 things to know before you invest:
1. The Application Period
The Commencement date for the Offer was 12 July, 2018. Unless NIFHL extends the period, you have until 8 August, 2018 to apply. You will need to have an account at the Trinidad & Tobago Central Depository Limited (TTCD) (which is set up via your chosen broker). If you do not have a TTCD account yet or are unsure about this part of the process,have a read of the steps to apply and of course, please contact us. At the bottom of this blog are some smiling faces you can click on to get in touch! We’ll be happy to help you process your application.
2. Investment Structure
The Offer is for three series of bonds that will pay a fixed interest rate semi-annually from the issue date (tentatively August 9, 2018) until the maturity date of each series, when the initial investment will be repaid all in Trinidad & Tobago dollars. Note that if the 5-year Series A receives too many proceeds in applications—more than TTD 1.2 billion—it will be oversubscribed, and each applicant will receive a refund and some lower share of the bond than applied for originally. Choose among the tenors carefully, but more on this later.
The bonds are priced at par (we introduce estimating their value near the end) and the minimum investment and lot size is TTD 1,000.
Last comes refinancing. Importantly, the bonds are not callable, meaning NIFHL cannot repay your initial investment before maturity. That aside, the provisions allow for additional bonds of identical type to be issued before the entire facility matures. This means a 5-year Series A can be recreated only to completely repay the old Series A and or to repay a portion of Series B at its maturity. In other words, assuming approvals by the Trustee (the administrator responsible for acting in investors’ best interest), NIFHL can borrow Series A multiple times as long as the debt outstanding for NIFHL and each Series do not exceed their issue sizes and all Series are repaid on time by 2038.
3. Purpose of the Offer
NIFHL was incorporated (May 2018) for the sole purpose of holding and monetising assets transferred by the Government of the Republic of Trinidad & Tobago (GORTT) in repayment of the debt due to GORTT by Colonial Life Insurance Company (Trinidad) Limited and Clico Investment Bank Limited, which is in liquidation. GORTT transferred the assets to NIFHL on 9 July, 2018.
Budget bookworms will recall GORTT mid-year review expectations for a TTD 4.2 billion deficit for fiscal 2018 given projections for higher energy and non-energy tax revenue and lower capital expenditure. That expectation was approximately 2.5% of GDP, down from the 3.1% budgeted originally. If the Offer is successful, then, GORTT stands to close the 2018 deficit by anywhere between 75% and 95%.
The structure was a strategic consideration to this end: a wide net of risk appetites via public offer using fixed income bonds—a regionally popular investment. The additional benefit was that NIFHL may retain voting rights of the transferred assets, which are all equity investments (we visit this next).
4. Equity-Backed Bonds
Company shares make up the sole assets of NIFHL. We’ll go into more detail in a later instalment but for now we have the basics (and you can click here for the CariCRIS credit rating report that discusses the underlying equities):
Understanding Equities
Shares represent ownership of residual company value. Investor earnings from equity are either dividends or capital gains. Dividends are paid to investors at the discretion of a Board of Directors appointed by shareholders. Otherwise, the company deploys the capital to grow its business in order to pay more dividends later. A delayed payoff often increases equity value today: a capital gain.
Given these basics, NIFHL equity assets are valued at some TTD 7.9 billion, comprising five companies, four of which see their shares traded among investors on the Trinidad & Tobago Stock Exchange.
Credit Risk
- The Offer promises to repay investors using these equity earnings, namely, the cash from its largest dividend payers: Republic Financial Holdings Limited (RFHL) and Trinidad Generation Unlimited (TGU). Together, their dividends would have paid NIFHL more than TTD 300 million annually for the past five years.
- NIFHL controls TGU; so it can pay dividends at its own discretion. On the other hand, it cannot sustain the promised payments on its own.
Similar to CariCRIS’ credit risk assessment, any analysis should involve assumptions about the structure, the equities and their interactions such as:
- NIFHL’s promised payments are affected by (initial) investor appetite;
- The ability to service these payments is affected not only by the equities’ prospects but also their dividend policies regarding the yield and timing of each dividend, and NIFHL’s operational expenses; and
- The above affect NIFHL’s decisions to refinancing or sell shares, which affect the above in turn.
5. What Can Go Wrong?
Please read the Prospectus for the risk factors of the Offer on pages 40 and 41, if nothing else.
As we introduced above, the Offer involves default risk and collateral risk: the risk that NIFHL is unable to pay investors on time and in full; and the risk that the equities’ value is no longer adequate to secure the debt. Against these are the use of a sinking fund (to which excess cash is allocated and managed explicitly for repayment), the Offer’s overcollateralization (TTD 7.9 billion backing TTD 4 billion) and an implicit guarantee from GORTT (as NIFHL is state-owned, after all).
Interest rate risk is twofold between reinvestment risk and price risk. The former regards having to reinvest interest payments from the bonds in a lower interest rate environment. For example, Series C investors may find difficulty finding competitive bonds to keep earning 6.60% per annum. Price risk does not consider investors’ decisions about interim cash flows in this manner but instead reflects the changes in the bonds’ value given changes in the interest rate environment. If newly investable bonds rates are very low, for example, the Offer’s comparatively high rates become competitive and investors’ higher demand will increase the bonds’ prices. Be wary that the reverse is also true.
TGU’s USD 600 million debt due to mature in 2027 gives its investors the right to redeem their investment at 1.01 times the maturity amount plus interest outstanding contingent on the event that “GORTT directly or indirectly ceases to have the power to direct or cause the direction of the management or policies of TGU”. Selling TGU shares, then, may result in the TGU investors enforcing their rights; this can adversely affect the value of the TGU shares.
6. Tax Exemption
NIFHL is subject only to a Green Fund Levy on its gross sales or receipts, but see below before engaging your tax advisor.
7. Rating
Regional credit rating agency, CariCRIS rated the bonds as investment grade: CariAA (High)—Regional Scale (Local Currency Rating) and ttAA—National Scale. This means that by CariCRIS’ assessment, there is a high likelihood of realising contractual payments relative to other (rated) Caribbean and local debt investments.
CariCRIS also assigned the ratings a stable outlook. The outlook is based on the expectation that over the next 12 to 15 months, the net dividend payments from the Shares will be more than adequate to meet the interest payments that will come due on the bonds during that period.
Remember that ratings are neither a recommendation of investment action, nor can they guarantee the accuracy of the information used in forming the credit assessment. Investment decisions are best made when understanding not only the investment at hand but also your portfolio, goals and circumstances. As for the guarantee of accurate information, consider that the concentration of RFHL and TGU equities in the Offer places significant importance on the fairness, reliability and investors’ scrutiny of their individual audited financials.
8. Public Listing
The bonds will be listed on the Trinidad & Tobago Stock Exchange. The main advantages to this are transparency and liquidity. The Exchange enforces the former, for example, as it can suspend trading in a listed company that does not submit audited financials. A listing facilitates the latter via the secondary market: both primary investors and new investors can trade the bonds through licensed brokers. Unfortunately, fixed income investments are often very illiquid. This means the majority of (large, institutional) investors are unlikely to trade without an advantageous bid-ask spread, making it more difficult for you to buy low and sell high.
9 .Thoughts on the Bonds’ Valuation
Is par a fair price for the Offer? Are the bonds likely to trade above or below par in the coming months?
In its Issuer Comment on May 22, 2018, Moody’s Investors Service expected less than TTD 4 billion in proceeds. Historically, an under-subscribed offering suggests a subsequent price decrease.
The bonds appear attractive relative to the latest May 2018 CBTT par curve. The valuation methodology is given potentially stale curve data, a complicated credit spread estimate given the structure, collateral, tax benefit and implicit guarantee. As value can be dominated by market participants’ behaviour however, note that even if the market estimated a discount following the issue date, an investor may probably never sell below par unless needing cash urgently or perceiving a crisis (involving GORTT, RFHL or TGU).
10. Suitability
How much of your portfolio is allocated to fixed income investments such as this? How would this accomplish your financial goals or investment mandate, be it retirement planning or risk management? How will you allocate your investment among the tranches? What are your views on the future interest rate environment?
These, among many questions, form the approach of not only determining whether an investment is good, but whether it is good for you.
