Jamaica Launches $8bn Exchange

Following the prime minister’s address Wednesday night and a meeting with investors Thursday morning, Jamaica has launched an exchange for JAD700bn ($7.86bn) of its local bonds, representing all categories of local debt except for treasury bills. In the deal, which does not involve reduction in principal, the government aims to extend maturities and save JMD40bn annually in interest payments. The maturity extension should be an average 2.5 years, according to RBS. Interest rates – which run as high as 28% – should be lowered from an average of 18%-19% to 12%. Over 350 securities would be consolidated into 23 new benchmark bonds in the deal, according to Fitch. This includes the introduction of inflation indexed bonds. Much is riding on the success of the offer, which will remain open until January 26 and be finalized by February 16. A $1.25bn standby loan from the IMF depends on the swap’s success. “There is likely to be a high rate of participation in this transaction, given strong moral suasion from authorities,” RBS says. “Retail investors would be harder to bring into the fold, but the government is “suggesting” a surtax on those that don’t participate in the deal,” it adds. The shop notes that IMF financing – likely negotiated with assurances of a near-100% participation – is key to making the debt exchange work, as part of it will be used to set up a $450m liquidity support facility for financial institutions that eventually face liquidity pressures as a consequence of their participation. “You can’t just cut interest rates almost in half without someone taking a hit,” says a US investor holding Jamaican external debt. He notes that local brokers and banks will absorb much of the loss, and also be vulnerable to secondary effects of the exchange, such as pressure on the currency. “The concern is that if you plug one hole, you can create leaks elsewhere,” he adds of the possible impact on the broader economy. Citi has been advising Jamaica on its options and is