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The House of Representatives on Wednesday (July 2) considered and approved Government of Jamaica guarantees in respect of a private placement facility in the regional capital markets in the sum of US$100 million.
This under the provisions of the Approved Organizations and Authorities Loan (Government Guarantee), to facilitate the refinancing of a portion of the Port Authority of Jamaica’s (PAJ) existing loan portfolio.
In addition, the House also approved the amended terms of two loans outstanding to the Bank of Nova Scotia Jamaica Limited (BNS) in the aggregate sum of US$75 million, comprising US$38 million and US$38.9 million.
A Ministry Paper, tabled by Transport and Works Minister, Michael Henry in the absence of Finance and Public Service Minister Audley Shaw, states that the government considered a request from the PAJ to amend its approach regarding the financing of a portion of its loan portfolio, and approved the change to raise the US$175 million required for the refinancing exercise. This, from that of a non-amortizing bond on the international capital markets, to a combination of an amendment to existing bank loans with the BNS for US$75 million, and a private placement facility for US$100 million in the regional market.
This, the Paper further states, followed a Cabinet decision in January 2008 approving the PAJ’s request for the issuance of: i) a non-amortizing bond for US$175 million to be used to refinance debts totalling US$143 million, and to replace capital items amounting to US$32 million, and ii) an additional government guarantee of US$67.5 million, since US$107.5 million of the debt to be refinanced already carried government guarantees.
The refinancing exercise, the Paper outlines, became necessary due in part to the fact that the repayment periods attached to the financing arrangements for the development of the Kingston Container Terminal have, over the years, been short relative to the life of the assets. It gives as an example, financing to acquire the ship to shore gantry cranes, which has a tenure of seven years, whereas the assets have a productive life of 20 years.
According to the Ministry Paper, a contract to undertake the refinancing and debt renegotiation exercise on behalf of the PAJ, was awarded to the firm Merrill Lynch in 2007 in the amount of US$1.9 million. The scope of works was primarily to: review, recommend, and negotiate debt consolidation strategies, and act as the “lead arranger” to put together the financing package to satisfy the objectives identified.
The approval was based on the analysis and recommendation of Merrill Lynch that a syndicated bank loan or the issuance of a non-amortizing bond were the available alternative refinancing methods at the time. The non-amortizing bond was selected as the preferred alternative given the fact that, as there would be no demand on cash resources for amortization, it would provide the PAJ with an opportunity to rebuild its liquidity position.
It was also the recommendation of Merrill Lynch that any realistic and cost effective alternative pursued then, would require the support of government, through the issuance of a government guarantee. This recommendation was based on the reality of the PAJ’s high leveraged position, and consequently its relatively low debt service ratio. The Paper points out that at the same time, credit markets had become more volatile, and lenders required full covenant packages or guarantees for non-investment grade issuances.
Subsequent significant adverse developments in the international capital markets associated with the sub-prime mortgage crisis, resulted in greater cautiousness by investors, and volatility in the markets. Based on the uncertainties, and the PAJ’s need to have the refinancing exercise concluded before the end of the first quarter of the fiscal year, a change in the approach to the fundraising exercise was deemed necessary.
The Ministry Paper states that after consulting with its financial advisor, Merrill Lynch examined the alternatives available in the short term to achieve the objectives of the refinancing exercise and the concept of a non-amortizing bond on the international capital markets was replaced by a combination of an amendment to the existing commercial loans with BNS for US$75 million, and a private placement facility for U$100 million in the regional capital markets.
Of note is that, of the US$143 million being refinanced by the new facilities, US$107.5 million is already covered in guarantees. However, since the US$100 million bond to be raised on the capital markets is a new and different facility with terms distinct from any previously guaranteed debt, a full guarantee will need to be provided in respect thereof.
Accordingly, the salient indicative terms of the facility are: an average life of 10 years; interest rate of 8.75 per cent per annum; a benchmark rate, bid side Government of Jamaica 2017 bonds at the quoted rate, two days prior to closing; and principal repayment commencing in year five on a percentage basis with the final payment in the amount of 40 per cent (U$40 million) in 2020.
Additionally, in respect of the BNS facilities, the bank has offered to amend the terms of two existing facilities amounting cumulatively to US$75 million. Since the previously approved guarantees were in respect of specific terms, it would be necessary to have government guarantees extended to the amended facilities.
The amended facilities will now have an average term of 13 years inclusive of a moratorium of four years on the principal repayments, and interest rates to be determined at the time of closing.
It is important to note that the guaranteed loans portfolio of the government and the PAJ will have a net increase of only US$67.5 million, since the facilities will be used to refinance existing debts. The paper advises that the Attorney General’s Department figured in the review of the documents and the analysis, in respect of the facilities.
Further, that pursuant to the provisions of Section 3(2) of the Act requiring the payment to the government of a commission not exceeding one per cent of the amount borrowed, it is proposed that the PAJ pay the government a fee not exceeding 0.125 per cent of the guaranteed facilities, payable in the Jamaican dollar equivalent within 30 days of the execution of the guarantees.
The Ministry Paper states that in the event Government is required to make payment under the facilities to be guaranteed, it is proposed that such payments would first be a charge upon the revenues and assets of the PAJ, to be repaid on terms to be agreed with the Ministry of Finance and the Public Service.