Higher yields on Bahamas international bonds
Despite the challenges sovereigns are facing on international markets, The Bahamas still witnessed significantly higher yields on its international bonds, by an average of approximately 520 basis points through early November 2022, the just released Mid-Term Debt Management Strategy FY2023/24 to FY2025/26 highlighted yesterday.
The Bahamas is avoiding the eurobond market in this environment, however, recent market outreach by the Debt Management Office (DMO) explaining the country’s improved economic health and the government’s diversified funding strategy for FY2022/23, has led to a reduction of yields on the short end of the curve, with a decrease of more than 800 basis points for the 2024 eurobond since October 2022.
“Rising interest rates in advanced economies, coupled with increasing global risk-off sentiment, exerted significant pressure on sovereign spreads and borrowing costs in emerging economies. This feed through to an increase in yields, of approximately 250 basis points through early November 2022, for the 10-year US treasury. In addition to hikes in reference rates, the JP Morgan Emerging Market Bond Index spread widened by almost 100 basis points over the same period, highlighting the amplified pressure on funding costs in emerging markets,” the report notes.
“In this challenging macroeconomic context, The Bahamas witnessed significantly higher yields on its international bonds, by an average of approximately 520 basis points, through early November 2022. Since the beginning of the COVID-19 crisis, The Bahamas’ synthetic 10-year USD yield firmed progressively to reach a maximum of 14.7 percent in August 2022, and has gradually decreased since then. Although foreign currency debt refinancing needs remain manageable over the medium term, The Bahamas’ international yield levels have made the eurobond market an unattractive source of funding.”
It continued, “In the short term, The Bahamas intends to access alternative funding sources on both external and domestic markets, including structured credits involving multilateral lenders, to secure funding at a lower cost.”
While the Bahamian dollar debt market remains overactive, the government admitted the need to encourage new market players despite an already diverse investor base.
“To this end, several initiatives are underway which focus on liquidity, transparency, secondary market trading, settlement mechanisms and investor diversification. Among these are the upcoming transition to an online auction for Bahamas government securities depository-registered participants,” the report stated.
To meet its financing needs this fiscal year, government considered four strategies – choosing the fourth – which called for addressing refinancing risk and balances cost through a combination of domestic market issuances and external facilities — the latter to include concessional/semi-concessional loans, structured credits involving multilateral lenders, and liability management transactions.
This strategy, according to the report, assumed $219 million in net financing — of which $133 million comprised foreign currency borrowings and $86 million in foreign currency.
“Although strategy four (S4) was selected as the optimal approach, uncertainties related to the global economy, market conditions and geopolitical developments may necessitate deviations from this strategy. Hence, the strategy will be reviewed in the context of emerging changes and adjusted accordingly. Despite the recovery in the macro-fiscal performance, the increase in debt levels associated with the COVID-19 pandemic was a key factor in most recent credit rating actions. In October 2022, Moody’s Investor Services downgraded The Bahamas from Ba3 to B1, but revised the outlook upwards to stable, reflecting the strength of the tourism-driven economic recovery underway and a narrowing of the fiscal deficit,” the report notes in the executive summary.
“S&P Global Ratings, in November 2022, affirmed The Bahamas’ credit rating at B+ and the outlook at stable, based on positive economic fundamentals which are supporting a lowering of the fiscal deficit and a slowing in the growth of government debt. Investor relations were enhanced over the course of the past year, in keeping with the government’s commitment to maintain the highest level of debt transparency and to support continued market confidence in both domestic and foreign currency debt operations. Apart from the ongoing publication of public debt data on the government’s website, investor outreaches took the form of deal and non-deal roadshows and targeted meetings,” the report further notes.