'Conditions right for bond market'

But investment bankers say costs, regulations could hinder growth

Sabrina Gordon, Business Reporter

Jamaica's investment bankers believe that conditions are ripe for the revival of the private bond market, but say that the pace of resuscitation would likely be hampered by regulatory rules and the high taxes charged by the Government for settling such instruments.

"We can expect to see a vibrancy in commercial paper-type transaction with the absence of high rates on GoJ (government of Jamaica) instruments,"Chris Williams, the CEO of the investment house, Proven, said last week at a capital markets seminar organised by the Jamaica Stock Exchange.

"... Now is an opportunity for us to step to investors with these instruments, which can also be listed on the Exchange," he said.

Data was not immediately available on the size of domestic market for private bonds. However, anecdotal evidence suggests that it largely collapsed over the past dozen years or so, as the Jamaican government competed aggressively with private borrowers for loans. It bid up interest rates.

Cheap alternative

Indeed, up to the mid 1990s, commercial paper, then a new and exotic mix to the instruments on Jamaica's capital market, represented a fast-growing business segment for investment houses. Firms found it a cheaper way to borrow than at the high rates charged by commercial banks.

But the market went with the financial sector collapse in the late 1990s, which was followed by the sharp growth in the government's appetite for debt to financing widening deficits.

With rates the government was willing to pay high, firms discovered a risk-free formula to invest and make money, rather than pumping their cash into real production.

However, the Golding administration's restructuring of over $700 billion debt a year ago has caused a sharp downward trend in rates on government instruments, causing investors to look for new avenues to returns on their investments.

"The market conditions are ripe for the corporate-paper market," Keith Duncan, chief executive officer of Jamaica Money Market Brokers said at the same conference at which Proven's Williams spoke.

Duncan drew the example of Digicel, regularly issuing bonds outside Jamaica, which are then recirculated on the domestic market. Part of the problem is the cost of doing the initial offer here.

"The challenge which remains is the stamp duty, tax on transfer of ownership and the onerous continuous disclosure requirements which are absolutely prohibitive," Duncan said.

For example, if a bond or similar instrument is not listed on the stock exchange, brokers explained, it attracts a stamp duty and a transfer tax at every transaction - every time the instrument is bought or sold.

But information received from the Stamp Office says stamp duties on bond transactions depend on the construct of the instrument.

In one case, if the bond is to be used as a primary security it can attract a charge of $3.75 per $200 of the value of bond.

Another set of charges may apply if the bond is to be transferred from one individual to another. In this case a stamp duty of $30 per $1,000 of the value is applied.

Potential hindrance

Another potential hindrance, investment bankers say, is the cost of transferring mortgages, which between government fees and bank charges could be up to six per cent of outstanding debt.

"Unless an debt is unsecured, it is likely to be backed by a collateral," Proven's Williams explained this week. That, often, is real estate that secures a mortgage.

"Most of these are held by banks and the cost transferring a mortgage is so high that a borrower might think he will lose the gain on lower- rates commercial paper," Williams said. "He might not bother."

Prime Minister Bruce Golding told the JSE conference that he had instructed financial companies' regulators to look for new ways in which the capital market can be mobilised.

Golding mentioned specifically the use of commercial paper instruments, but did not say if his ideas covered the issues about which the investment bankers complained.