Moving into the Bond Age

Government’s latest move in the financial sector to stimulate the bond market is being seen by analysts as a good thing. Not only does it allow small man into the bond market, but it also provides Government with a an opportunity to bring down the high cost of its debt, financial gurus have said. In this first issue under the new system, the Government is looking to raise $300 million by putting 15-year bonds on the market at a coupon or interest rate of 6.15 percent.

According to the prospectus, the bond issue, the first of two for 2004 “are both intended to refinance existing high cost debt.”  The auction opened last Friday and will close tomorrow at 1 pm. Bonds will be dated August 3, 2004. The maximum allotment, which is aimed at the small investor, through a non-competitive bid, is $20, 000, the prospectus said. With the formal launch of the Auction System for Government Bonds last week, an investment window has been opened, whereby any individual can now trade in government bonds on the open market. The move also sets the groundwork for the creation of an active secondary market while simultaneously improving the functioning of the government bond market. As the Minister in the Ministry of Finance, Senator Conrad Enill said at the launch, “The existing institutional arrangements for the issuance of government bonds in Trinidad and Tobago were far from efficient.”

He explained that bonds were “not often traded, but were typically bought and held to maturity.” Enill further pointed out that, “The bond market was essentially an underwriter’s market with the stripping of issues before they are resold to final investors. “Within this framework, yields were not market-determined, nor did they facilitate and foster liquidity in the domestic markets,” added the minister. Now, under the Auction System any individual can walk into anyone of the intermediaries appointed by the Government to deal with retail clients and arrange to buy government bonds.

It has appointed several financial intermediaries, including the Unit Trust Corporation (UTC;) Caribbean Money Market Brokers (CMMB); Inter Commercial Bank and Mercantile Bank, Scotia Trust and Clico Investment Bank to take non-competitive bids. A second issue for the same amount will be launched in September. Reacting to the new system, Varun Maharaj, Managing Director and Chief Executive Officer of Inter Commercial Bank, one of the intermediaries in the issue for non-competitive bids said chinks needed to be worked out. “I  think it’s a good system. I have worked with it in the developed market, but we still need to work out the hiccups in the system.”

He noted though that some of the details are not very clear. “How are we going to be compensated for the administrative work we will have to do to get it working right?  Will it be a fixed fee or some sort of commission? These are two of the areas which must be sorted out,” he added. CMMB boss Ram Ramesh said Government’s move to stimulate the bond market was a good thing, noting that his company will provide a secondary market for these bonds. He used an example of an individual who wants  a bond for $20,000 and wants to raise some cash. He doesn’t need to sell the bond, Ramesh said.

The investor can go to CMMB,or any other appointed intermediary, and arrange a “repurchase agreement.” That is, he sells the bond with the intent of buying it back from CMMB at a fixed price. “So you don’t lose the bond, but you still have taken cash from the bond, so at the end of the agreed period, you can buy back your bond. You don’t have to wait for 15 years. You can use the market to get liquidity for those bonds,” stated Ramesh. At the launch, Enill said  the Government was committed to developing a capital market. “The existence of a well-functioning government securities market with multiple maturity structures to create a smooth benchmark yield curve, will be an important underpinning of the domestic bond market. In turn, the benchmark yield curve will become a platform for the development of the wider capital market.”

Ramesh described the auction system as “a very significant move by the Government,” stressing that it has the potential to stimulate the bond market in Trinidad and Tobago. TT, he added, is fast emerging as a regional financial centre, noting that “it is very important for us to have an active bond market that is able to facilitate transactions like these.” “One of the things Government mentioned, which is also very important to note, is there are very few markets in the world where a government can go to the public market and raise long-term debt,” added the broker. Ray Sumairsingh, Managing Director of ANSA Finance and Merchant Bank reflected pretty much the same thoughts. He said although the mechanism for the auction was still to be explored, his company was going into it with “open eyes.”

He said he regarded it as a learning process, but admitted that it was well thought out at the Central Bank level and added that at the level of the intermediaries it was a game with “new rules.” Another important objective of the Auction System, stated Ramesh, would be to help “smoothen the maturity spectrum of the government bonds issue.” He said when one looked at the government’s domestic bond market, the yeild curve was too erratic. Asked whether Government was capitalising on the current liquidity in the system, Ramesh said he believed so. “This $300 million is for refinancing some of the higher cost debts they have on their books, $24 out of every $100 is for debt service, which actually is not too high. Nnevertheless, Government is aiming to bring down the cost of debt.”

Minister Enill summed it all when he said, “The government bond market provides a signaling mechanism for the rest of the financial system, disseminates information, facilitates the management of risks and helps in the pricing of other financial assets. “In fact,” he continued, “the yield curve of government securities provides a benchmark guide to the future behaviour of inflation and interest rates and very importantly, it establishes the benchmark for the valuation of all other fixed income securities, thereby facilitating trade and improving the liquidity of all other securities.” An active government bond market can serve to increase financial efficiency and the competitiveness of the economy, he said.