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Investing in NIF tax-free bonds
The offer to the public of tax-free bonds by the National Investment Fund Holding Company Limited (NIFHCL) is expected to cost $40 million to launch and market. Individuals will have first preference over institutions in the allocation process and foreigners will be allowed to invest in the fund.
This was revealed during a pre-launch briefing hosted recently by lead broker First Citizens Brokerage and Advisory Services Ltd.
The bond is guaranteed by dividend flows from five companies which are sufficient to repay obligations of the bonds. Republic Financial Holdings will form 54.7 per cent of the fund, Trinidad Generation Unlimited 25.7 per cent, Angostura Holdings 12.3 per cent, Witco 5.1 per cent and One Caribbean Media 2.2 per cent. (See pie chart)
Since the Government is the 100 per cent shareholder of NIFHCL there is an implied support to ensure payment of the bonds. However, there is no explicit government guarantee, so the bonds are priced about one per cent above current government bond returns to provide investors with added returns.
Some assets that have been put in the NIF and the flows from these have been captured and ring-fenced by assigning them to a trustee. The expectation is that the dividend flows should be sufficient to repay the obligations which are the principal and interest over the 20 years of the bonds.
How the investment works
The NIF will benefit corporations which invest in it as they will not be taxed on the investment. A company with a 30 per cent corporation tax rate will have to invest the equivalent of 6.4 per cent five-year taxable bond to get the same net income returns as the five year 4.5 per cent bond from NIFHCL. This is where bonds from NIF become an attractive investment.
The fund comprises five assets: Republic Financial Holdings Ltd (RFHL), Angostura Holdings, Witco, One Caribbean Media and Trinidad Generation, collectively worth $7.9 billion. These assets will cover the $4 billion bonds.
There will be an operating fund and a sinking fund. All dividends from the $7.9 billion in assets will go into an operating account where the trustee, First Citizens Trustee Services, has deed of charge.
A deed of charge means all the dividend payments that go into the two accounts will be used only for payment of interest and principal on the bonds. There is then a deed of charge, similar to a mortgage charge, on the share assigned and on the account.
Once the dividends go into the operating account they stay there for six months until the end of the period when the coupon is due. The coupon is then paid to the T&T Central Depository, the paying agent.
Any excess gets swept into a sinking fund account which is then used for redemption of the bonds. Only the dividend flows will be used to service the coupon and principal.
When the dividends come in, the only thing that is going to be deducted are the NIF’s annual operating expenses.
NIF has a board of directors with no management. The directors are all internal, all public servants. Any other function is outsourced, such as payments to auditors to prepare financials, payments to paying agents and registrar and website maintenance fees.
Senior management of First Citizens would not be allowed to invest in NIF.
Republic Financial Holdings Ltd—a financial services group comprising several subsidiaries and associated companies. The group is engaged in a wide range of banking financial and related activities, mainly in the Caricom region and Ghana.
• Profits may be impacted by higher industry tax rate
• The tempered growth prospects in the domestic economy would be cushioned by growth in overseas subsidiaries
• There may be some downside risks related to the Government of Barbados
• Future dividends over the near term are expected to remain at historic levels
• In the medium to long term, dividends are anticipated to increase as the domestic economy’s performance improves
Angostura Holdings Ltd—through its subsidiaries it engages in the manufacture and sale of rum, aromatic bitters and other spirits worldwide.
• In 2017, the group rationalised and restructured their operations, changed its executive management team and business model
• The group strategically reduced its dividend payment in 2017 in order to facilitate greater reinvestment in the development of its export markets
• The benefits of the restructuring was evident In the Q1 results where the cost of goods sold fell by 10 per cent year on year, boosting net profit by 75 per cent
• Over the near term, future dividend payments are expected to remain on par with 2017 payments given the group’s export strategy and improved profitability
• In the medium to long term, dividends are projected to increase as the group’s international strategy gains traction
Witco—a subsidiary of British American Tobacco (Investments) Limited, a company registered in the United Kingdom. Its ultimate parent company is British American Tobacco plc, a company registered in the United Kingdom. The principal business activities of the company are the manufacture and sale of cigarettes.
• The company’s diversification strategy into lower end products would continue to bode well as the domestic economy slowly recovers.
• The company will continue to face competitive pressures from illicit brands
• The change in customer behaviour to low priced brands is expected to be permanent in nature. Thus performance and dividends are expected to remain subdued in the near term
• Once the economic recovery picks up, the company’s financial results should also improve
Trinidad Generation Unlimited (TGU)—Incorporated in December 2006, TGU’s principal activity is to engage in the acquisition, construction, ownership and the operation, management and maintenance of power generation facilities. The company is wholly owned by the Union Estate Electricity Generation Company Ltd, an entity controlled by the Government
• TGU has a reliable revenue stream; T&TEC (currently its only customer) is obligated to make payments for up to 93 per cent of contracted capacity regardless of whether T&TEC takes full delivery of power generated, force majeure events, regulatory changes or certain TGU defaults
• These payment obligations are under a Purchase Power Agreement (PPA) and are fully and unconditionally GORTT guaranteed.
• The PPA ends in 2041 which exceed the life of the NIF bonds
• TGU can invoice up to a maximum of 95 per cent payments in US-dollars under the PPA. This hedges operating, maintenance and finance costs that are denominated and/or paid in US dollars
One Caribbean Media—through its subsidiaries, the company is engaged in media services, wholesale distribution, broadband services and the sale of other goods and services.
• With 67 per cent of its revenues coming from T&T and 33 per cent from Barbados, the group’s growth prospects are expected to be tempered in the near term, evident by its Q1 2018 results.
• The rebound of the domestic economy should serve to boost OCM’s revenues and in turn dividend payments in the medium to long term.
— Information provided by First Citizens Investment Services Ltd
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