Bond issues

One of the major issues facing the country as this recession unfolds is the pressing need to review the State Enterprise sector. A Cabinet-appointed committee, chaired by Dr Terrence Farrell, was established to examine the SOE sector, but we have no idea yet as to their recommendations.

petroOne of the hugest State Enterprises is Petrotrin, a major player in the national economy, with the immense influence of the OWTU on the side of its workers. A great deal of discussion is now emerging on whether or how Petrotrin could be restructured or privatised.

On 9th October 2015, the newly-installed Petrotrin Board issued a Press Release under the rubric “Facing and Overcoming Our Current reality” – the primary challenge was said to be ‘high and increasing debt’.

jsc report petrotrin2The Parliament’s first Report of its Joint Select Committee into State Enterprises examined Petrotrin and was published in June 2016 – the first recommendation of which was –

…the Committee heard that the major and immediate challenge facing Petrotrin was liquidity…as a result of the following factors:

  • continued downward trend in…Oil prices;
  • bond commitments (US$850 Mn and $750 Mn); and
  • high operating costs in the context of declining revenue….” (pgs 8 & 9)

These extracts are from the JSC testimony of Petrotrin’s Chief Financial Officer, Ronald Huff, on 21st March 2016 –

“Mr. Huff : Yes…the US $850 million bond…is due in August of 2019, that was originally placed in August of 2009…those proceeds were primarily directed towards capital expenditures, specifically the gas optimization project in all the plants that were involved in that project…If we desire to extinguish that bond early…The make whole provision would mean that…it would cost us over a billion dollars US, about a billion, seventy to make whole the 9.75 per cent interest that that bond has attached to it over the next three, three and a half years. So, the early extinguishment of that bond has really not been a serious alternative for Petrotrin. As we look forward to 2019 the intent would be to refinance the bond at that point in time. Now, that gives us about three years to put forward a trajectory, if you will, on Petrotrin’s financial results. That would best prepare Petrotrin to re-approach the bond markets in a three-year time period. So, it is very critical for the company to be always thinking about how our financial statements are going to look over the next three years. Very critical…those are the things were (sic) look at, constantly monitor, and it is never far from the back of our minds….” pgs 52 & 53
(emphases are mine)

Clearly, Petrotrin’s debt cost is a tremendous burden, so three points emerge from all this –

  1. Interest Cost – the 9.75% interest on $850M USD is an annual cost to Petrotrin of $82.875M USD. On 7th January 2017, Petrotrin issued ‘Financial Realities at Petrotrin‘ which specified “…the interest payments on its US$850M bond at approximately TT$687M per year…”. That cost is staggering – an intriguing footnote is that this equates to an exchange rate of about $8.30 per USD, which is not far from reality;
  2. Early settlement – In March 2016 that was estimated to cost just over $1.0Bn USD, but Petrotrin could not afford that kind of cost;
  3. Financial Strategy – According to its Chief Financial Officer, Petrotrin’s team is engaged in serious strategising as to its financial trajectory.

But that was in March 2016, the Petrotrin testimony to the JSC, which published its Report in June 2016.

Then, on 29th July 2016, the Ministry of Finance issued a Media Release –

The Government of Trinidad and Tobago successfully launches a 10-yr US $1 Billion International Bond

These extracts are instructive –

“…Trinidad & Tobago successfully launched a US$1Bn 10-year bond in New York on Thursday 28th July 2016, marking its first international bond issue in three years. The bond issue was…more than three times oversubscribed, with US$3.5 billion in orders received from over 250 international investors, thus allowing the country to comfortably raise the targeted US$1Bn, with prospects for raising additional amounts in excess of the required US$1Bn…The 4.5% interest cost of the Bond compares very favorably with recent Government bond issues…”

“…The Roadshow…successfully promoted Trinidad and Tobago as a viable investment destination; with a cohesive plan for fiscal consolidation and economic management in the face of plummeting oil and commodity prices…”

“…Proceeds of the Bond are to be utilized to finance the country’s Development Programme over the rest of this Fiscal Year as well as over the 2017 Fiscal Year…” (emphases are mine)

All in all a success-story, but there are questions –

If US-based investors were willing to buy $3.5 Billion of Trinidad & Tobago’s debt at 4.5% in July 2016, how come Petrotrin is still saddled with that ruinous 9.75% bond? If Petrotrin was able to retire that 9.75% bond with fresh funding at say 5%, that would produce annual savings exceeding $40M USD – which equates to $335M TTD, using the ‘Petrotrin’ exchange rate. Was that option explored?

At the very least, this represents a big missed opportunity to reduce our country’s foreign exchange outflow. The alternative, to paraphrase a late jurist, is ‘an appalling vista, simply too ghastly to contemplate‘.


4 thoughts on “Bond issues

  1. Given the 9.75% yield my suspicion is these bonds trade for well above par to actually yield around 5%. Thus early redemption or repurchase would require Petrotrin to pay significantly more than they owe. The only hope may be that if Petrotrin credit rating has falling this may reduce the cost of buy back.

  2. It is inexcusable that employees hired to make decisions in favor of Petrotrin shy away from making pertinent billion dollar decisions to embrace billion dollar losses. To what end and to whose benefit is this done?
    It is common knowledge that when a debt is incurred, plans too, should be made to repay the debt.

    Issue Date: August 14th 2009
    Tenor at Issue: 10 Years
    Maturity Date: August 14th 2019
    Bond Rate 9.75 (Feb and August) 6%

    Issue Date: May 8th,2007
    Tenor at Issue: 15Years
    Maturity Date: May 8th, 2022
    Bond Rate 6% (May and November)

    1. Sinking Fund
    Considering the fact that there were financial periods from 2009 to date 2018 where Petrotrin was in a favorable financial position, making surpluses, a Sinking Fund should have been set up in anticipation of the bond maturity. This could have been done in lieu of some unnecessary auxiliary departmental activities and of course- annual profit share to employees.

    Was this done? If not, why?

    2. Considering the details presented by you Afra, that the annual bond interest payments of over 500 million dollars and the projected interest for the remaining time before the bonds mature would cost the company more than the 1 billion dollar cost of selling the bonds early, it makes absolute sense to repay the 1 billion, rather than accumulate interest which surpasses the cost of doing so. So why wasn’t this done?
    3. Based on the maturity type of the bonds Petrotrin could “Make- whole call” to pay off the debt early/before maturity date, but that too, was not done.
    4. Over the years there were a number of changes in interest rates, which should have resulted in possible premiums and discounts of bonds as the market value changed. Did the company make adjustments based on these?
    If not, why?

    It is sadly startling to me that a company with thousands of long standing professionals, would choose to not prepare for the repayment of these bonds via a sinking fund and to deliberately miss opportunities to sell and or refinance the bonds when interest rates were favorable. I must question also the recommendations made over the near decade by their External auditors with regards this bond treatment or lack of the same, and why Petrotrin even paid for their opinion?

    Is this all just a matter of sheer incompetence and confirmed costly oversight or rather calculated/coerced pre-privatization partnered initiatives by 3 groups of company stakeholders?

    So now that the company is in a quandary, it is important to know:
    1. Who are the persons who made a decade of poor financial decisions on behalf of Petrotrin’s bonds?
    2. Whether or not their external auditors advised appropriately?
    3. And most importantly, who are the bond holders?

    Is there a possibility of a lucrative correlation between the decision makers, the bond holders, the external auditors and other stakeholders?

    There must be myriad of reasons which satisfy this sheer financially irrational behavior on the part of Petrotrin. that is even further compounded by the Capital Expenditure investments and losses in WGTL.

    Let’s hold them accountable!

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