Jamaica’s Bond Buyback Targeted US$2.33 Billion and Got Back a Fifth
JAMAICA · FINANCE
Key Facts
- —The result Investors offered back US$476.6 million against a target of roughly US$2.33 billion.
- —The share About a fifth of what the government sought.
- —The 2028s The 6.750% notes due 2028 drew US$343.2 million, the strongest response.
- —The 2036s The 8.500% notes due 2036 drew US$2.15 million. They pay the most.
- —The catch Jamaica has not published the rate on the new bond funding the buyback, so the saving cannot be assessed.
- —The timing The offer closed on Wednesday 9 September and settles on 17 September.
The 2028 notes came back and the 2036 notes did not. That split tells you what investors think about holding Jamaican risk for another decade.
Jamaica’s bond buyback targeted roughly US$2.33 billion of its international debt. Investors offered US$476.6 million.
That is about a fifth of the target. The Jamaica Gleaner reported the outcome on Friday.
The offer closed on Wednesday at five in the afternoon, New York time. Settlement is due on 17 September.
Which Bonds Came Back
Three series were covered and they behaved very differently. The 6.750% notes due 2028 drew US$343.2 million.
The 8.000% notes due 2039 drew US$131.3 million. The 8.500% notes due 2036 drew US$2.15 million.
That last number is not a rounding error, it is a refusal. Holders of the highest-coupon bond declined almost entirely.
The Gleaner’s reading is the obvious one. Holders of the 2036 bond had the least reason to sell, because it pays the most.
Why a Bond Buyback Splits Like This
A bond paying 8.5% in a falling-rate world is a valuable asset. Selling it back to the issuer means finding somewhere else to put the money at a lower yield.
The 2028 bond is different. It matures in about two years, so holders get their principal back soon anyway.
Selling early to the government at a fair price costs a holder little. That is why the near-dated bond drew the strongest response.
This pattern is what a well-designed bond buyback produces. It is also why the government could not have expected full take-up.
What the Government Was Trying to Do
Jamaica announced a new note offering on 2 September. It intends to apply part of the proceeds to fund the buyback.
The logic of such an exercise is to replace expensive or near-dated debt with cheaper or longer-dated debt. That smooths the repayment profile and can lower interest costs.
Whether it achieved that here cannot be judged. Jamaica has not published the interest rate on the new bond.
Without that rate the arithmetic is unavailable. A buyback funded at a higher coupon than the debt it retires saves nothing.
Citigroup Global Markets and Scotia Capital acted as dealer managers. Global Bondholder Services was the information and tender agent.
What a Fifth Actually Means
A partial response is not a failed exercise. Buybacks are offers, and issuers set targets above what they expect to receive.
Retiring US$476.6 million of external debt is meaningful for an economy Jamaica’s size. It is not the transformative liability swap the headline target implied.
The government is not obliged to disclose what it hoped for. Nothing published indicates disappointment.
The market signal is the useful part. Investors will part with paper maturing in two years and will not part with 8.5% for another decade.
The Longer Story
Jamaica’s presence in international debt markets is itself the achievement. The country ran one of the highest public debt burdens in the world barely a decade ago.
Debt to output exceeded 140% in 2013. A sequence of IMF programmes and sustained primary surpluses brought it down dramatically, under successive governments of both parties.
That consolidation is among the more impressive fiscal adjustments any small state has completed. It was achieved with broad political consensus, which is rarer than the adjustment itself.
A liability management exercise is the normal behaviour of a country that has regained access. Ten years ago Jamaica was not in a position to choose which of its bonds to retire.
The context now is harder. Hurricane Melissa damaged the tourism sector that earns the foreign exchange to service this debt.
August arrivals at the main tourism airport fell almost a quarter. That is the money this debt is repaid with.
That is the tension in this week’s numbers. A government managing its debt book competently while its main foreign currency earner recovers from a storm.
More: Jamaica news in English, every day from The Rio Times.
Frequently Asked Questions
What is a bond buyback?
An offer by an issuer to repurchase its own outstanding bonds from investors, usually to retire expensive or near-dated debt and replace it with cheaper or longer-dated borrowing.
How much did Jamaica get back?
US$476.6 million against a target of roughly US$2.33 billion, or about a fifth.
Why did the 2036 bond barely respond?
Because it pays an 8.5% coupon, the highest of the three series. Holders of a high-yielding asset have little incentive to sell it back.
Did the exercise save money?
It cannot be assessed. Jamaica has not published the interest rate on the new note offering that funds the buyback.
Sources: Jamaica Gleaner.
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