Imbert’s mistake$!


By financial consultant VED SEEREERAM

The headlines read “Im­bert: This Government saved $890m” as reported in one of the daily newspapers dated June 24th, 2020. The ar­ticle further reported that the Minister said the $250 million of a $500 million bond will be used to refinance a bond maturing this month.

The Minister went on to say that since the previous bond was raised at a rate of 9.75% and the new bond is being raised at 4.5% then the Gov­ernment will effective­ly get an annual cost savings of $89 mil­lion or a savings of $890 million over the life of the refinancing.
There are several is­sues with the Minister’s statements which do not reflect re­ality. It is indeed unfortunate as one would expect a better understanding of finance from such a senior Cabinet Minis­ter. But, regrettably, this is not the case!
Let’s look at the facts:

1.Not a Refinancing

This was not a refinancing but rather a repayment of Bonds that will be maturing this month. The meaning of refinancing is very specific. For example, if the initial bond was for twenty years and dur­ing the life, say at the end of the tenth year, the borrower approaches the lender and request to refi­nance at a lower rate and the lender agrees to reduce the rate from 9.75% to 4.5% for the remaining ten years then the Minister could have boasted that the country will be saving the $890m. This is not what happened.
This seldom happens as the terms of bonds are seldom renegotiated during the life of the bonds except in times of de­linquency. There are also severe penalties in the event of early re­payment. Under no circumstances should the repayment of a bond at maturity be considered a refinanc­ing. The original bond was repaid according to the original terms and therefore there were no savings to the Country with regards to that bond. To say otherwise reflect a lack of understanding of simple finance.

2. Wrong to Compare Today’s rate with that of 20 Years Ago

The Minister compared the 9.75% rate on the bond raised twenty years ago with the 4.5% bond now being raised. This is like comparing apples and oranges since it not the same. If you need to compare then it is the spread over the US treasures that would have to be compared and not the abso­lute rate. To do otherwise would be disingenuous.
The twenty-year US Treasuries was approximately 6.75% in 2020, giving a spread of 3.00% to ar­rive at 9.75%. With a rate of 4.5% and a ten-year US Treasury rate of 0.75% then the spread on the cur­rent bond will be 3.75%. A further adjustment to the spread will be re­quired to incorporate the difference in the ten-year rate and the twenty-year rate.
On the simple analysis, it ap­pears that the present government did a worse job than the previous government when you compare a higher spread on the current bond of 3.75% compared to the 3.00% in the previous. One can justify a higher spread today based on the deteriorating country risk. That is understandable. However, to com­pare absolute rates from twenty years ago to what is prevailing to­day is wrong and deceptive.

3.Three hours and 45 minutes

This is indeed a record of epic proportions and should be re­corded in the history books. Usu­ally, it takes weeks to prepare the prospectus, conducts a roadshow, answers investors’ questions and concerns, tests the market, set the bond pricing and finally do the documentation. Hats off to the Minister of Finance and his team. Surely the Covid- 19 has changed the way we do business. Why such a hurry though? The Government already has access to the Heritage and Stabilization Funds, so why the hurry? What is the Government going to do with the extra US$250 million? Banks are notorious for giving wrong advice and one is to wonder the purpose of the addi­tional funds.
What is the exact meaning of budget support? Is the budget deficit much more than the $15 bil­lion? Hopefully, it is not to shore up the country’s reserves. This is a common trick banks use to in­crease their lending and fee earn­ings. Many countries fall for this hoax. To borrow to put into re­serves weaken our balance sheet and increase our country risk.

4.Oversubscription by 219%

An oversubscription by 219% is a bad sign of overpricing. This means that the bonds could have been raised at a lower interest rate. The lead bank did not give good financial advice in the best interest of the country and the haste may have cost the country substantial sums of money. The arrangers do not often get the best rate in the market as they usually propose a higher than the market rate to get the bonds sold to get their fees. Governments are easy picking for Investment Banks and there are many examples where our Gov­ernment has been ripped off in the past. I doubt things have changed. We are yet to get an explanation for overpriced interest rate swaps and overpriced yen swap.

5. Greece all Over again

Banks are also notorious for over lending to Government as in the case of Greece. In their interest to earn fees they close their eyes to the credit risk and often lead coun­tries to the edge. We are already overburdened with debt and we are now encouraged to burry ourselves in the debt trap where we have no escape except default and bailout.
The minster was indeed sur­prised that funds came in so easy. He knows that the country’s fi­nances are in a precarious posi­tion and it is no surprise that he may have been very surprised that banks are willing to lend to an en­tity that cannot repay the interest but must resort to further borrow­ings to do so.
The banks are reckless in their lending and we will be paying a heavy price for these misadven­tures. Time will tell sooner than we think.