Responses To Market News

One of the conditions for the granting of Jamaica’s request for a loan facility of approximately US$1.25 billion by the International Monetary Fund (IMF) is the successful completion of the Domestic Debt Exchange Initiative, which came into effect on January 14, 2010.

What is the Domestic Debt Exchange Initiative?

The Debt Exchange Initiative is an offer by the Government of Jamaica (GOJ) to Jamaican investors to exchange J$700 billion of existing GOJ issued local bonds (excluding treasury bills) for 24 newly issued bonds. The offer is for a voluntary exchange and applies to just about all domestic bonds (fixed rate, variable rate or USD denominated) issued by the GOJ up to and including December 31, 2009 with maturity on February 16, 2010 or after. By exchanging approximately 350 existing bonds for the new bonds, the GOJ intends to save roughly J$40 billion in annual interest payments. Using this mechanism, the GOJ seeks to not only meet the IMF conditionalities but to also facilitate fiscal sustainability by easing both its debt servicing costs and bond market liquidity.

What are the Terms of the Initiative?

The terms of the initiative include (but is not limited to) the following:

    • The issuance of 24 new bonds (10 fixed rate, 9 variable rate, 3 USD denominated and 2 CPI* indexed bonds)
    • The fixed rate and CPI indexed bonds are non callable (cannot be redeemed before maturity)
    • Investors receive an equivalent principal amount plus cash payment of any interest outstanding/ unpaid
    • Longer principal maturity and lower interest rates
    • The interest rates applied are as follows:

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Interest Profile Bond:

11 – 13.25% Fixed rate bonds (3 months – 30 years)

Interest rate fixed at 11.75% for initial Variable rate bonds (1.5 – 22 years)

3 – 12 months; thereafter, an added

1 – 1.5% applied above the 30 day or

90 day treasury bill yield.

Maturity 2013 = 6.75% USD Denominated bonds

Maturity 2014 = 7%

Maturity 2016 = 7.25%

Real return = 2 – 4.25% CPI Indexed bonds (12 and 20 years)

*Consumer Price Index

Note: Any further information including the terms on both the Exchange and previous bond instruments may be obtained from the Ministry of Finance, Debt Management Unit or Bank of Jamaica website.

UPDATE: National Debt Exchange (NDX) 2013

The NDX was offered by the GOJ to Jamaican investors in a bid to exchange approximately $860 billion of existing GOJ local bonds for newly issued bonds. This was launched on February 12, 2013 as a precondition for receiving financing support from the IMF, which was re-engaged by the GOJ in 2012.

For details including questions & answers on the initiative and it’s success, see the Ministry of Finance website (weblinks tab).

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2. RECENT CREDIT RATINGS: What do they mean? (19/11/2009)

Since the start of 2009, Jamaica received a number of credit ratings. In the past month, the country received two ratings: one from Standard & Poors (S&P) issued on November 2, 2009 and the most recent by Moody’s Investors Service (Moody’s) issued on November 18, 2009. Both credit ratings issued were downgrades, meaning that the ratings moved down on the respective rating classification scales from a position of a relatively lower risk to the potential for a higher risk of credit default.

S&P’s Downgrade

S&P downgraded the country’s long term credit rating to CCC (triple C) from a rating of CCC+, which was issued on August 5, 2009 when the agency downgraded Jamaica from B- (B minus). The agency’s downgrade to CCC came with a negative outlook for Jamaica against the background stated to be the growing risk of a debt exchange operation that would indicate selective debt default. S&P further explained by stating that “Jamaica’s severe fiscal situation as well as the vulnerabilities in the government’s debt profile may give it incentives to renegotiate with its creditors, particularly its resident creditors that hold the larger bulk of Jamaican debt.”

The statements are basically explaining the reasons (among other things) why the country was downgraded. They imply that based on a set of country fundamentals (economic and political factors), Jamaica is seen as having an increasing likelihood of having to default on its debt obligations. The downgrade to CCC says that the debt issuer (GOJ) is vulnerable to nonpayment and likely to default if certain favourable conditions are not realized.

Since good sovereign (country) credit rating is necessary for developing countries in particular to access funding in the international markets, a downgrade such as this one means that Jamaica’s access to funding could become more difficult. In addition, a sovereign credit rating acts both as a signal for attracting foreign direct investments (investments into a country by foreigners) as well as general investor confidence in local investments. The downgrade therefore sends a negative signal not only to foreign investors but to local investors with an interest in government issued debt.

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Moody’s Downgrade

The assessment is similar when applied to Moody’s downgrade on Jamaica’s local and foreign currency bonds. The move down the rating scale from B2 to Caa1 also came with a negative outlook. This was against the background of (among other things) the delay in the GOJ reaching an agreement with the International Monetary Fund (IMF). In support, the agency stated that the IMF agreement was essential to “maintain confidence, meet this year’s government funding needs and provide foreign currency inflows to sustain the external position”.

Moody’s credit rating classification ranges from Aaa, Aa, A, Baa, Ba, B, Caa, Ca to C with Aaa indicating the lowest risk of credit default and C – the highest risk of credit default. Numeric modifiers of 1, 2 and 3 are added by Moody’s to the rating classes from Aa to Caa. According to the agency, a rating with a numeric modifier of 1 added to any of those rating classifications indicates a ranking in the higher end of its rating category. The downgrade to Caa1 means that the debt issuer (GOJ) is in poor standing and is at a very high risk of credit default.

Similar to the potential impact stated to result from S&P’s downgrade, the impact on perceptions of investment in Jamaica stemming from Moody’s downgrade is also that of sending a negative signal to both local and foreign investors with an interest in GOJ issued debt.

* GOJ – Government of Jamaica

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