Finance Minister Colm Imbert has called the National Investment Fund (NIF) “a gift” to the nation, and given the superior interest rate on the asset-backed bonds the NIF Holding Company Ltd (NIFHCL) is set to issue next week, at least compared to government bonds, he may have a point.
“We looked at the little man, because we want the little man to benefit from this,” Imbert told a post-Cabinet press briefing last week.
The NIF bonds are corporate asset-backed bonds. The assets are $7.9 billion worth of shares repaid to the government upon the liquidation of the Clico Investment Bank, as part of its $23 billion bailout agreement in 2009. After the global financial crisis in 2008, Clico, once the region’s biggest conglomerate, went bankrupt, and as an entity “too big to fail”, the TT government stepped in, taking control in an effort to stabilise the potentially massive economic fallout for the region otherwise.
The CIB liquidated assets were $4 billion worth of shares from Republic Financial Holdings Ltd; $970 million Angostura Holdings Ltd shares; $405 million West Indian Tobacco Co Ltd shares; and $200 million One Caribbean Media Ltd shares. The government placed these shares into its specially created NIFHCL, and added its 100 per cent shareholding of Trinidad Generation Unlimited (TGU), worth $2.025 billion, bringing the total value of the fund to $7.9 billion. (See table).
The next step was bringing the NIF to market. It had been initially announced that the fund would be listed on the TT Stock Exchange in a model much like National Enterprises Limited, another publicly listed government holding company where shares including TSTT and the NGC NGL companies form core parts of the assets. But, Imbert said, “After a comprehensive look at the response of the TT public to investment opportunities we concluded that if there’s too much risk, little people in particular might not be too inclined to invest, because there’s a feeling that they might lose money.”
Shares or units in a mutual fund, for example, could fluctuate, and even though the assets of the fund are among the local equivalent of “blue chip” chip stocks and some of the best performers, people might still be skeptical.
So, the government went with corporate bonds, and as per an amendment to the Corporations Tax Act passed in Parliament last month, the coupon payments (annual interest rate payment) on the bonds, which had already been tax-free to individuals, will now be tax-free for corporations, making them more attractive.
There are three types of bonds on offer, at a cost of $1000 per bond: five-year bonds, at 4.5 per cent interest; 12-year bonds at 5.7 per cent interest; and 20-year bonds, at 6.6 per cent interest. (See table)
Coupon payments would be made semi-annually. Looking at the five-year bonds, for example, holders would receive 2.25% interest every six months or $225 per bond, for five years. Upon maturity of the bonds, holders would receive the principal invested, ie $1000 per bond.
These rates are far higher than anything on the market, right now, Imbert noted, where many fixed-income funds give returns of less than one per cent. “We are now offering 4.5 per cent, which is more than five times what is on the market and there is no risk,” he said.
For corporations, the tax savings on one of these bonds means that for them to generate the same income that they would get on these bonds, they would have to invest in a significantly riskier investment, with interest rates of 8.1 per cent for a 12-year bond, and 9.4 per cent risk for a 20-year bond.
These bonds, are, however, a comparatively safe investment. “There is no risk whatsoever that this can possibly fail,” Imbert said. That’s because the value of underlying assets are double the value of the offer. There’s also an implicit government guarantee because the NIFHCL is wholly owned by the government.
But, it should be noted that the bonds are not explicitly guaranteed by the government — otherwise, it could be counted as government debt. Instead, they will be honoured using the cash flow generated from the dividends of the assets. A conservative estimate (assuming all dividends remain steady for the duration of the issue) is that the dividends will generate $370 million; coupon payments are estimated at $224.4 million. The excess will be paid into a sinking fund that will be used to repay the bond at maturity.
Should there be a shortfall in that sinking fund, at least in the short term, the NIFHCL can choose to issue another five-year bond offering, but ultimately, the assets in the NIFHCL can comfortably cover all the bonds issues in this initial public offering up to the 20-year maturity.
As part of the NIFHCL agreement, the sinking fund, and the asset are ring fenced, and cannot be used for anything but repayment of the bonds. Any short-term bond issue can only be used for refinancing. It is expected, however, based on the strength of the companies that future earnings will increase, potentially offsetting that need.