Question

In: Economics

It was around November, 2019, the Government of The Bahamas announced a Rate Reduction Bond for...

It was around November, 2019, the Government of The Bahamas announced a Rate Reduction Bond for Bahamas Power and Light of $580 million. This amount of $580 million, is $70 million less than what was previously announced of $650 million. The Bahamas Government had also stated at the time of the announcement that the terms and conditions associated with the $580 million bond placement were still being worked out as the rating agencies, Moody’s, Fitch and or Standard and Poor’s had not reviewed the offering to develop the appropriate pricing of the bonds, where the pricing in effect, is the interest rate placed on these bonds.

The borrowing by the Government of The Bahamas on behalf of BPL has created some degree of anxiety in some quarters, among residential and commercial subscribers of BPL services. This anxiety is due in no small measure to the proposed price increase in the price electricity to assist in offsetting the cost associated with financing the BPL bond. There is a proposed price increase of 15% by consumers, both residential and commercial consumers to finance the BPL Bond.

  1. What is your understanding of the Rate Reduction Bond? What is the purpose behind the Bond? Why is it referred to as a rate reduction bond?
  2. What is the relevance/importance of having the bonds rated by international agency, i.e. Standard and Poor’s, Fitch and or Moody’s? What is the significance, if any, of a favorable rating by one or more of these rating agencies?
  3. What are your thoughts based on your own research/analysis, of the approach taken by the Government of The Bahamas to improving the efficiency of the corporation through this, i.e. Bond Placement, and other measures to improve the efficiency of the corporation?
  4. Based on your analysis, what are your general thoughts on the 15% increase in electricity bills?
  5. What impact, if any, will the increase have for the following entities:
    1. Consumers
    2. Business community
    3. General economy of The Bahamas
  6. What recommendations, if any, will you provide to the Government of The Bahamas based on your research as it relates to this topic?

Solutions

Expert Solution

Rate reduction bonds are used to finance indebted companies which were deregualted by the government. As there were previously controlled by the states, they had severe losses. As they are now private and need to bridge that gap, these bonds are issued by the utility companies, which is the purpose of these bonds. They are referred to as rate reduction bonds because they have the scope to reduce funding costs, and achieve relief from capital requirements.

The relevance behind having the bonds rated by international agencies is to increase the reach to investors and to make it clear that these are genuine bonds. If there is a favourable rating than people will consider it safe to invest in and the bond will obtain higher funds.

Even though the government has taken the initiative to improve the state of finances of BPL, there seems to be less clarity and often divergent and changing communication means. The government wants to help in declining the tariffs but then being contradictory by imposing a hike in bills. Thus it needs to give more assurances of what it wants to attain and help in assuaging concerns of citizens by giving exact clarity as to why they will be borrowing on behalf of BPL.

15% increase in electricity bills isn't the right way around as to decrease debt they are issuing bond, so it doesn't make sense why they need to increase bill to finance the bond, which will lead to more indebtedness as consumers will shy away from using more electricity.

a. Consumers will find it expensive and will reduce the consumption or opt for renewable sources.

b. Business community will observe an increase in their input costs which will lead to lower profit levels, if the hike increase is not passed onto the consumers.

c. Inflation will increase in the economy of Bahamas which will lead to lower savings and investments.

I would suggest the Government of Bahamas to be clear and clarify why the hike has to take place, how much debt will be serviced through the bond. I would tell them to focus on increasing the bond size issue which could fortunately cover the cost of the debt and increase profitability levels sooner.


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