JDX Will Ease Pressure on Interest Rates

Senior Director in the Debt Management Unit at the Ministry of Finance and the Public Service, Pamella McLaren, says that Jamaicans have the power to collectively change the country’s debt profile.
She said Jamaica’s debt dynamics have become stressed, as a result of the combined effects of the accumulation of persistent fiscal deficits, high domestic interest rates and weak economic growth.
“This has resulted in a threat to the sustainability of Jamaica’s debt,” she said.
Mrs. McLaren said the Jamaica Debt Exchange (JDX) was developed against the background, and in a framework, that seeks to lower cost and extend the maturity profile.
“With the extending of maturities, refinancing risks will reduce and there will be an easement of pressure on interest rates,” she stated.
She noted that the transaction is designed to achieve a substantial reduction in the cost of the Government debt, thereby creating fiscal space and time to consolidate the economic reform programme.
“Jamaica’s domestic debt profile is approximately 64 per cent of variable rate. This transaction will result in a realignment of the debt portfolio. It has been designed with a view to reducing the share of variable rate debt, increasing the fixed rate component, maintaining the foreign currency debt in the portfolio and introducing new CPI index bonds,” she added.
“This realignment offers you, the investors, an opportunity to hold some variable rate debt, switch some variable into fixed rate instruments and CPI index bonds. US dollar debt can be exchanged for US dollar securities,” she pointed out.
“This is consistent with reducing volatility and uncertainties in annual interest costs and will give us, the debt managers, a level of predictability in terms of debt servicing requirements,” she argued.
Mrs. McLaren said that the debt exchange was also designed to be simple enough to be able to attract even retail investors.
The JDX offer was launched on Thursday (January 14) and will expire on Tuesday (January 26). Settlement is expected to take place on Tuesday (February 16).
“A little over $700 billion in aggregate principal amount, substantially all of our marketable local debt, is eligible for the exchange. This includes securities with fixed and variable rates, as well as securities denominated or indexed to the US dollar,” Mrs. McLaren disclosed.
The senior director said only bonds issued prior to December 31, 2009 are eligible for the exchange. The transaction, she informed, is a fixed price offer with an exchange ratio of one for one or par for par. This means that for every dollar of old notes investors will receive one dollar of new notes plus the accrued interest on the old notes through to the settlement date.
The new notes comprise 24 new benchmark securities that will replace almost 350 different issues. The old notes are characterised by small amounts.
“During our consultation with the market a common theme was the lack of liquidity in the securities which somewhat impeded trading in the secondary market. The considerably large benchmark issues in the debt exchange will provide this liquidity that the market has been asking for,” she remarked.She also said the new fixed rate securities will be issued on a non-call life basis.
“There has been a lot of discussion particularly during last year over the call feature in our securities, and we have listened to the market, so we are now offering non-call life securities,” she observed.
Mrs. McLaren explained that this means that the Government cannot, at any point, call to redeem the securities.
Pricing for new bonds will be in the range of 12 to 13 per cent, for the Jamaican dollar component, and around seven per cent for the US dollar.
The CPI index bonds start at two per cent and step up as high as four and quarter of real return.
“I expect the pension funds and insurance companies, in particular, will be very receptive to these new bonds. You spoke we listened,” Mrs. McLaren said.
“We have priced all the new instruments on a curve, starting with the short end being priced off the prevailing Bank of Jamaica (BOJ) one month rate of 10.5 per cent, with longer instruments at higher rates,” she said.
“Pricing is consistent with the low end of the range at which we have borrowed in the last few years and bills in the lower rate environment that will apply going forward when you properly account for the substantial IMF and multi lateral support package and improve fiscal performance.”
“You’ll have a choice as to which new bonds you subscribe to in the exchange however we’ll apply rules to ensure that maturity is extended and that the proportion of fixed rate bonds in the portfolio is increased.”
She said all bonds will be required to be exchanged for longer dated maturities, in most cases, including an extension of at least two years.
Fixed rate bonds can only be exchanged for new fixed rate bonds with coupons ranging from 11 per cent to 13.25 per cent and tenures from three months to 30 years. US dollar denominated and US indexed bonds can only be exchanged for new US dollar denominated bonds.
In the US component of the portfolio investors will have a choice of three bonds, the coupons range from 6.75 per cent for three year tenures, seven per cent for four year tenures and 7.25 per cent for seven year paper.
Currently there are US dollar index instruments in the portfolio however these will not be offered in the exchange, Mrs. McLaren said.
With regard to VR bonds these can be exchanged for new fixed rate bonds, variable rate bonds or the new CPI index bonds. The Government is offering two CPI index bonds, a 12 year, at two per cent real rate with a step up to four per cent over four years and a 20 year at two per cent for two years with a step up of 44.25 per cent after four years.
Mrs. McLaren further said with the new instruments the Government will be limiting the amount in the portfolio just to test to see how they perform and the risks associated.