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Barbados’ Bond Trading Dilemma

Prepared by: Vangie Bhagoo-Ramrattan
Head, First Citizens Economic Research Unit
Date: 24 October 2019

In November 2018, the Government of Barbados completed its local currency debt restructuring exercise - a transaction amounting to BBD11.9 billion. The exercise was central to the Barbados Economic Reform and Transformation (BERT) Plan, which is supported by the International Monetary Fund. The successful restructuring resulted in an upgrade of the country’s local currency rating to B- from ‘selective default’ (SD) previously. As part of the debt exchange program, the government issued Series B, C, D, F, E and G bonds, and the offer was accepted by the majority of domestic creditors, including the commercial banks, the National Insurance Scheme and the Central Bank of Barbados (CBB). As a result of the restructuring, economic uncertainty has been reduced and the debt trajectory and fiscal flexibility have become more favourable.
Contingent on the continued implementation of the BERT plan and the IMF program, the Barbados economy will continue to recover gradually and there should be greater fiscal stability. Despite this and the completion of the debt exchange program since November 2018, there has been little to no trading of the newly issued government bonds, even though they are in fact tradeable securities on the secondary bond market. Based on guidance from the Barbados Stock Exchange, the structure of the instrument does not currently allow for separation of the strips. One of the biggest obstacles is the lack of information regarding pricing and the construction of a local currency yield curve. There is no single agreed upon curve that can be used in the market and as such, it has become a vicious cycle that has perpetuated a situation of an illiquid securities market.
The secondary bond market is pivotal to an efficient functioning capital market. It ensures that buyers and sellers can easily transact with transparent pricing information. A liquid secondary market can also help investors in price discovery, which then informs a proper, market-determined yield curve. The ability to trade on the secondary market also allows individuals greater liquidity and the opportunity to invest funds and thereby earn higher returns. Further, the markets are usually heavily regulated, meaning that investors’ funds will be protected.
According to the CBB in a release in November 2018, the issuance of the new securities will benefit settlement efficiency. Further, the CBB characterized trading of government securities in the secondary market as ‘thin’ and pointed to one of the major impediments to trading activity as ‘the length of time it takes for securities’ transfer, with respect to the registration of ownership’. As such, the new securities issued in the restructuring exercise are dematerialized and should facilitate faster, more efficient transfer of ownership, as opposed to using physical certificates. In a further attempt to improve efficiency in the market, the CBB is planning to introduce a ‘web-based interface between its bond registry, the brokers and the Barbados Stock Exchange, where players have read-only access to verify the holdings of investors seeking to divest’.
In order to trade the new securities, investors must contact a registered broker of the Barbados Stock Exchange. The Broker then verifies with the CBB the holdings of the investor before any trade is executed. To date, there has been widespread disagreements across corporate market players in terms of pricing of the Series B and D securities as the range of quoted prices is very wide. One of the major considerations in trading these new securities is the fact that retirees, who would have bought the original government bonds using pension proceeds, are the majority creditors for the Series B. While these retiree individual investors are willing to sell their exchanged bonds, it was recently determined that a 25% withholding tax would have to be applied, in addition to the discounted price - a major disincentive for active trading in Series B bonds.
As we approach the one-year mark since the conclusion of the local currency debt exchange program by the Government of Barbados, we hope that the market inefficiencies are reduced and that the hindrances to secondary bond trading activity are alleviated. Further, we encourage market participants to share information to help promote price discovery, which in turn can lead to increased activity on the secondary bond market and the creation of a market-determined yield curve, which can then be used as a benchmark for pricing other debt instruments in the market.


DISCLAIMER
First Citizens Bank Limited (hereinafter “the Bank”) has prepared this report which is provided for informational purposes only and without any obligation, whether contractual or otherwise. The content of the report is subject to change without any prior notice. All opinions and estimates in the report constitute the author’s own judgment as at the date of the report. All information contained in the report that has been obtained or arrived at from sources which the Bank believes to be reliable in good faith but the Bank disclaims any warranty, express or implied, as to the accuracy, timeliness, completeness of the information given or the assessments made in the report and opinions expressed in the report may change without notice. The Bank disclaims any and all warranties, express or implied, including without limitation warranties of satisfactory quality and fitness for a particular purpose with respect to the information contained in the report.This report does not constitute nor is it intended as a solicitation, an offer, a recommendation to buy, hold, or sell any securities, products, service, investment or a recommendation to participate in any particular trading scheme discussed herein. The securities discussed in this report may not be suitable to all investors, therefore Investors wishing to purchase any of the securities mentioned should consult an investment adviser. The information in this report is not intended, in part or in whole, as financial advice. The information in this report shall not be used as part of any prospectus, offering memorandum or other disclosure ascribable to any issuer of securities. The use of the information in this report for the purpose of or with the effect of incorporating any such information into any disclosure intended for any investor or potential investor is not authorized.

 

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