By Dennise Williams, Staff reporterTHE recent US indexed bond issued by the Ministry of Finance (MoF) is open from November 4 -10. With an apparent two-pronged effect in mind, the MoF seeks, according to industry experts, to defend the local currency and sop up the Jamaican dollar equivalent of US$46.2 million coming into the financial market on November 7, 2003 from an debt instrument issued on November 2000.
This indexed bond will attempt to replace the fixed rate US$ Indexed Bond issued on November 7 which paid 11.125 per cent. This new bond will pay quarterly interest of 11.625 per cent. The offer, aiming to attract an unlimited amount of money states that the exchange rate for conversion will be J$59.3981.
As at Tuesday, November 4, the exchange rate was as high as $60.69 but since yesterday, the dollar revalued slightly and was selling for an average price of $60.02. One industry expert speaking to the Financial Gleaner said, "The strategy of bonds like these is to help to protect the exchange rate."
Overnight interest rates
The debt instrument tenure lasts for 20 months with the interest payments to be made at quarterly intervals with the final payment due and payable on July 10, 2005.
Financial industry players believe that this bond will perform in line with similar offerings by the MoF. However, it is not expected that the full take up of the offer will happen until Monday, November 10, the last day of the offer. The main hindrance to an early uptake is the skyrocketing, overnight interest rates. Our contact at Capital & Credit Merchant Bank informed The Financial Gleaner that, "people will be going on in based on the response. "The feedback from our customers is in line with the normal offers of this nature. But the height of activity won't take place until Monday. Right now the market is tight for Jamaican dollars. People want to take advantage of the high overnight rates. Earlier in this week the overnight rate was in the mid high 40s and I even heard of rates in the 50s."
Speaking about the expected success of the November 4-10 issue, Mark Walters, vice-president of Treasury and Asset Management at Dehring Bunting & Golding (DB&G) stated, "Both institutional and individual investors have been calling us to get into this instrument. We expect this offer to do well." Walters stated that this offer combines attractive interest rate and attractive exchange rate. Said Walters, "Consider the investor with US$1 million. In 2000, he would have bought the instrument at J$44,605,000.00 and using today's rate, encashed it on Friday (November 7) to realise J$60,260,000.00. Plus he would have been earning interest on his money during the holding period. So this shows the benefit of an index bond. Your investment moves with the exchange rate. Now, this investor could then take his money and buy the equivalent of US$1 million for $59,398,100.00. So he makes his capital gain upfront. This investor does not suffer from devaluation."
Previously in October, the MoF offered a Jamaican dollar debenture and held a Treasury Bill auction. Both were successful. The Debenture, Series 'Ac' collected J$12.5 billion. This instrument mopped up liquidity from 2003 Series Q (coupon rate 16.25 per cent) with principal of J$6.057 billion due on October 23, 2003 and Series S (coupon rate 18 per cent) with an interest payment due on October 20, 2003. Additionally, the MoF held a Treasury Bill auction on October 29 for J$400 million with a tenor of 182 days paying an average yield of 23.07 per cent. That auction was oversubscribed by 192 per cent. On the international scene, also in October, the MoF borrowed US$50 million from investors in Trinidad & Tobago at approximately 9 per cent. As at October 4, investors in the twin island republic can earn up to 5 per cent on investment instruments such as Repurche Agreements. According to published reports, the offer by the MoF in Trinidad & Tobago was oversubscribed.
