Putting Liquidity to Work
March 1, 2003
The government and investors want to establish greater depth in the local capital markets.
It is hard to believe that the Trinidad and Tobago Stock Exchange, housed in a red and yellow building opposite the port in downtown Port of Spain, is the hub of Caribbean finance. The Exchange's trading floor resembles a small college lecture room with its whiteboards and handful of chairs. The 30 listed companies are marked on the white board in black pen and trades are done over the counter. Trading hours last from 9 a.m. until 11 a.m. on the average day, and until noon on busy days. The drift of a Caribbean calypso from a radio in the background leaves the impression of a market that has failed to keep up with the times. But that is about to change.
Trinidad considers itself, quite rightly, a center of finance in the Caribbean. The country's commercial banks have branched out across the English-speaking Caribbean and have emerged as leading financiers of Caribbean governments and corporations. Yet an underdeveloped local capital market prevents the country from fulfilling its potential as a regional financial center. "Trinidad and Tobago is well poised to become the financial center of the Caribbean but there are some structural issues that must first be addressed," says Ram Ramesh, chief executive officer of Caribbean Money Market Brokers. Financial institutions are keen to accelerate the expansion of the local market. Plans to create a regional ratings agency are in motion and the stock exchange is implementing an electronic central depositary. Prime Minister Patrick Manning and Central Bank Governor Ewart Williams have said that the development of the capital market is a cornerstone of their economic policy.
In mid-January, the Central Depositary, which is part of the Trinidad and Tobago Stock Exchange, implemented the first phase of an electronic securities settlement system that promises to settle trades within five business days, still slow but a vast improvement on the 10 days to six weeks it can take to settle a trade through the paper system. Up until now there hasn't been much need for an automated system. The local equity market is small and illiquid, and there hasn't been an initial public offering since British West Indies Airways floated 49% of its stock in 2000. The most recent listing was in February. Jamaica Money Market Brokers listed on Trinidad's exchange a month after it sold 17.1% of its stock in Jamaica in January 2003, to allow local investors to trade its stock, raising J$900 million ($16.9 million) from 12,000 investors. Ramesh says Caribbean companies typically sell small portions of their equity because majority shareholders fear losing control. Raymond Gatcliffe, head of corporate banking at Citibank in Trinidad,says, "Ownership of companies is concentrated in blocks and it is difficult to get in and out. Liquidity is a problem for any serious institutional investor [wanting] to take a position of any size." The lack of liquidity makes price determination difficult. Daily trading volumes are thin, averaging TT$1 million ($160,000) a day. The trouble is, local companies have borrowed comfortably from local banks for years at competitive rates. It is even more attractive now that annual interest rates have fallen to around 11.5% at the end of last year from 16.5% in 2000. Companies also are unwilling to expose their accounts and management to public scrutiny.
Trinidad's growing institutional investor base is demanding a healthier and more active equity capital market. Stephen Bayne, managing director of RBTT Trust Limited, estimates the institutional market has about TT$16 billion ($2.58 billion) in assets under management.
The government hopes to invigorate the market by reducing taxes for companies that list. Ronald Milford, the country manager of US retailer PriceSmart, which has two supermarkets in Trinidad, suggests that the government could also stimulate interest in the equity market by listing privatized companies. Hugh Edwards, the Stock Exchange's general manager, says this is a possibility. "The government has used the Stock Exchange as a vehicle for divestment in the past." In 1999, the government listed NEL a holding company of partially privatized public companies such as National Flour Mills (NFM), Telecommunications Services of Trinidad and Tobago Limited (TSTT) and Trinidad and Tobago Nitrogen.
Peter Clarke, chief executive officer of West Indies Stockbrokers, a subsidiary of RBTT Financial Holdings Limited, says, "I would prefer to see individual companies divested rather than being pooled together in the way NEL was." There are at least two healthy companies earmarked for a listing in the next couple of years: Unit Trust Corporation, a public sector investment trust, and First Citizens Bank, created by the merger of three failed banks taken pver by the government in 1993. Clarke says Trinidad must be part of a regional stock market if it hopes to attract regional and foreign investors. "We have to recognize that we are small and global investors are not prepared to differentiate between different markets in the Caribbean," he says. The trouble is reaching a consensus on where it should be based. Jamaica and Barbados are both keen to host a regional Stock Exchange.
Gatcliffe thinks establishing a regional rating agency would help unify the Caribbean capital markets. "This is one area with no precedent," he says. "There are no rating agencies established in the individual markets and this could be an important contribution to a regional stock exchange." A group of 10 financial institutions from the English-speaking Caribbean has commissioned a feasibility study for creating a regional rating agency. International banking regulations may have propelled these banks into action. Ramesh says new guidelines from under the Basle Accord governing stronger risk assessment could be implemented between 2004 and 2006, and banks will have to either beef up their internal risk assessment departments or seek the services of an independent rating agency.
A regional rating agency would increase transparency in the market that could encourage borrowers to finance themselves in the debt capital market. Trinidad's debt capital market has developed more soundly than the equity market. Last year, 16 bond issues totaling TT$3.41 billion came to market. Liquidity is plentiful and local banks and trust funds are eager to put their money to work. "Each month the government is injecting TT dollars into the system from oil and gas taxes and not enough is being taken out," says Gatcliffe. "There is excess liquidity chasing investments." Cash is so plentiful that Caribbean governments and regional companies have been coming to the country since 1997 for financing. The governments of Belize, St. Kitts, Grenada, Dominica and St. Lucia have floated bonds in Trinidad with maturities ranging from three to 20 years. The government of Belize even raised $40 million in two-year, mortgage-backed notes through the Development Finance Corporation of Belize last year. Royal Bank of Trinidad and Tobago structured and placed the bond. Structured trade finance and project finance transactions are also common in Trinidad. Last year, Citibank led a $40 million, 13- year bond with a 7.5% coupon for natural gas processing company, Phoenix Park Gas Processors.
Building a Benchmark
As active as the debt capital market is, issuance is somewhat haphazard and price determination is tricky. There is no secondary market for fixed income securities. Although the government has been issuing bonds locally since the late 1970s, it has not fleshed out a proper yield curve. Ramesh says, "A well-developed yield curve is an essential element to a debt capital market. Issuers need a benchmark to assess whether they are getting fair value." The government's maturity profile is somewhat irregular. Lyndon Guiseppe, head of the corporate bank at Royal Bank of Trinidad and Tobago, says, "The government had developed short and long term maturities, but there is something of a black hole in the medium-term area." The government has gone some way already in addressing that problem. It issued a five-year tranche with a 7% coupon as part of a TT$300 million, three-tranche issue last year. Clarke says the government could help develop a secondary market in government debt by publishing a calendar of its auctions of government debt. Caribbean Money Market Brokers has come up with an interim solution. It has developed its own yield curve, a bond guide of all fixed income securities issued. The bond guide is widely used in Trinidad and Ramesh hopes it will become a precedent for a regional fixed income index. Governments also need to show greater leadership. Says Clarke, "We need a change in pan-Caribbean thinking. There is a lot of rhetoric from the politicians and little action, and this has affected our ability to integrate."
Modernizing to Meet Demand
There was little need for a central depositary in Trinidad and Tobago until about 10 years ago because investors would trade shares informally. However, globalization and the aggressive cross-border expansion of Trinidadian companies into the rest of the Caribbean, the United States and Europe, have generated more interest from investors in local shares from the Caribbean and beyond.
Anthony Tait, general manager of the Central Depositary, says international investors approached the Stock Exchange more than two years ago, expressing their interest in buying shares. These inquiries prompted the Exchange to move towards an electronic Central Depositary. "We had fund managers from [Boston-based] State Street Bank who wanted to buy shares in T&T companies and they needed an electronic depositary," he says. At least one Trinidadian company had its ambitions to list American Depositary Receipts in New York thwarted because foreign investors needed an electronic Central Depositary. Says Tait, "Investors were taking a serious foreign exchange and credit risk by being forced to wait several weeks before settling a trade."
Tait says the electronic system already has greatly reduced risks for local investors. For example, they can sell their securities by instructing their broker instead of delivering the physical certificates to the broker. It also protects them against the loss or damage of physical securities because the Central Depositary keeps the certificates in a vault at the Central Bank. Previously, investors would keep their share certificates, risking loss or damage. It could take weeks for an investor to obtain a duplicate certificate from a company registrar or transfer agent. Tait expects trading on the TTDC to begin in three months. "The first step is for all the brokers to [start] using the automated trading system in the Exchange and then to [begin] trading from their offices." Tait hopes to move to a T+3 settlement system by the end of the year and eventually move towards linking the individual central depositaries of the English-speaking Caribbean. Settling trades in three days is perhaps a more realistic short-term ambition than merging the region's central depositaries. Creating a regional central depositary depends on the launch of a regional Stock Exchange, which many locals doubt will happen for many years. "There has to be the political will across the Caribbean for a regional capital market, and at the moment it is not there," says Godfrey Bain, chief operating officer of Angostura Holdings, a listed brewing and distillery company.