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What do bond markets tell us about TCL’s fate?
On pages four and five of this publication, the Business Guardian carries a story outlining the fact that two of T&T’s largest companies have been successful in issuing ten-year bonds at rates of below 3.5 per cent.
In May, when TCL went to the international capital markets, some investors in what is called the high-yield bond market indicated to the Claxton Bay-based cement producer that it would need to pay them an annual interest rate of over ten per cent (as high as 15 per cent) to get them to buy TCL’s US$325 million of senior secured first lien notes—US$295 million of which was meant to repay its existing bondholders.
On May 20, TCL said in a notice that it had decided to postpone the refinancing “and await more favourable market conditions, which are expected in the near future.”
What accounts for the fact that potential investors in TCL’s debt require them to make interest payments that are three or four times higher than a blue-chip local company?
Generally, there is a close relationship between risk and reward in bond markets. The higher the risk of owning the debt of company A, the more the investors in that debt have to be compensated.
But are rates of 12 to 15 per cent justified based on the fact that TCL operates within a regional market that is protected by a 15 per cent Common External Tariff and in economies that can be perceived as being past their worst in terms of dealing with the dread impacts of the global financial crisis?
In other words, TCL has a captive market, most of which is past its worst in terms of construction spending.
Why then would international investors demand 12 to 15 per cent from TCL, while local investors were willing to accept less than 3.5 per cent from Massy Holdings and First Citizens?
Could it be that the TCL board fundamentally misread both the local and international bond markets?
In its May 20 notice, TCL stated: “In the first quarter of 2014, the TCL group received four unsolicited proposals to refinance the group’s US$300 million debt. Three of these proposals recommended accessing the bouyant US high yield bond market, which, the group was advised, had the depth to refinance the existing debt at lower interest rates, facilitating improved cash flow and more flexible covenants.
“It was also advised that the debt and capital markets in the Caribbean are too thin to handle this level of refinancing.”
Now it is significant that Massy Holdings was able to raise the TT dollar equivalent of US$190 and another large local corporate is negotiating to raise the TT dollar equivalent of US$285 million.
And it is also significant that the local bond market was not too think to accommodate Massy and First Citizens and TSTT at almost the same time or that TCL was unable to refinance its debt at more favourable rates and covenants.
Would TCL have been better served trying to raise the $2 billion it needed to refinance its debt on the local market?
And it could very well be that the international high-yield market is now permanently closed to a company like TCL.
In the last month or so, the international high-yield market has changed substantially.
Last week Friday, the Reuters report on the issue stated: “Investors worldwide pulled $4.4 billion out of high-yield junk bond funds in the week ended July 30, marking a third straight week of big withdrawals from the funds, data from a Bank of America Merrill Lynch Global Research report showed on Friday.
“The latest outflows from funds that hold the riskier, lower-rated debt brought withdrawals in the past three weeks to $12 billion, according to the report, which also cited data from fund-tracker EPFR Global.
“The high-yield market, which typically moves in sympathy with equities, has been on investors' radar after its multi-year rally. High-profile investors have warned repeatedly this year that junk securities were trading at lofty prices.”
On Monday, Forbes magazine wrote: “Amid a substantial investor retreat from the market, US high yield bond issuance dipped to $25.3 billion in July, down from $29 billion in June, according to S&P Capital IQ/LCD. It is the smallest monthly tally since the $15.6 billion recorded in February.
“The activity comes as investors, amid much talk of a market bubble, are pulling cash from high yield funds at a rapid clip. During the month there was a net $5.3 billion outflow from U.S. funds, largely offsetting $6.5 billion in cash inflows during the previous six months, according to Lipper.”
The point here is that the risk that some international investors were willing to take in the high-yield market may have evaporated—maybe temporarily and maybe permanently.
Certainly, the argument could be made that if TCL was unable to raise US$325 million in May, it would be more difficult now, given the imminent end to the US Federal Reserve’s quantitative easing programme.
Where does that leave TCL.
The other issue the company has to face is that its news flow in August 2014 is much less favourable than it was in May.
It could be that the international bond investors formed the judgment that TCL was
TCL has two significant dates coming up that could well have a profound impact on the company, on the T&T stock market and on the thousands of citizens of this country who are invested in the local stock market (either directly or indirectly, knowingly or unwittingly).
• By tomorrow, it either needs to find $90 million in cash to fulfill an Industrial Court ruling that it must pay all of its backpay commitments to its unionised workers by August 8, OR it must convince a judge of T&T’s Supreme Court that an injunction stopping last week’s Industrial Court ruling is justified;
• It also has a deadline of 5pm on August 19 2014, which is when the special (compulsory) meeting of TCL is due to be held by the shareholders representing 54.7 per cent of the issued shares of the company who are trying to remove six TCL directors: Andy Bhajan; Bevon Francis, Carlos Hee Houng; Leonard Nurse; Brian Young and Rollin Bertrand.
How would international bond investors perceive the fact that the company has to fight its workers in court (to prevent the company being forced to pay workers what the local Industrial Court has mandated) and is likely to continue fighting its majority shareholders in court (as it tries to stop the compulsory meeting of shareholders?
Neither of these legal battles would have been part of the investor package that TCL says 500 institutional investors across North America and the Caribbean received.