Bahamas ‘Cannot Afford’ More Rating Downgrades – Bahamas Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Bahamas First's top executive yesterday warned that this nation "can't afford to have more sovereign downgrades" due to the negative impact on private sector credit ratings.

Patrick Ward, its president and chief executive, said ratings for the insurer and other Bahamas-based companies could be threatened by increased 'country risk' stemming from this nation's reduced creditworthiness.

"I don't think the Bahamas can afford to have more sovereign downgrades," Mr Ward said, "looking at it from the point of view of entities like Bahamas First that have ratings which are in some way linked to the sovereign rating of the country.

"Future downgrades could start to challenge the ratings Bahamas First and other companies have."

The negative consequences for Bahamas-based companies as a result of this nation's eight-year sovereign downgrade trend were recently highlighted by the Nassau Airport Development Company's (NAD) downgrade.

The move by the Fitch rating agency was directly linked to the Government's deteriorating creditworthiness, with Dionisio D'Aguilar, minister of tourism, saying it had a direct impact on NAD's debt servicing costs.

"Their [NAD's] debt got downgraded because Fitch said there's additional sovereign risk," the Minister previously confirmed to Tribune Business. "They went to downgrade NAD one rating below investment grade, and one effect of that was they needed to increase the bond reserve fund from $19 million to $38 million."

This, Mr D'Aguilar added, had forced NAD to increase passenger and other user fees at Lynden Pindling International Airport (LPIA) in a bid to meet the increased debt costs.

NAD's situation shows Mr Ward's concerns are not without merit, with the Bahamas First chief pointing out that the Bahamas was not alone on the issue.

He added that all Caribbean nations, apart from Trinidad & Tobago, which is barely clinging on, had lost their 'investment grade' creditworthiness with one or both of Standard & Poor's (S&P) and Moody's.

Mr Ward said the impact had already been felt by the region's insurance industry, with Barbados-based Sagicor - a multi-jurisdiction giant - having been placed on 'credit watch with negative implications' due to fiscal weaknesses in its home country.

Bahamas First and several competitors, including RoyalStar Assurance, Summit Insurance Company and Security & General, are also all rated annually by A. M. Best, the insurance industry rating agency, for their financial strength and creditworthiness.

Apart from focusing on each company, A. M. Best's analyses also factors in country risks such as the Government's fiscal position, state of the economy and condition of the insurance market.

Further downgrades by either Moody's or Standard & Poor's (S&P) would threaten to impact A. M. Best's ratings of Bahamian insurance underwriters, and the former has already indicated its alarm over the 2017-2018 Budget.

Moody's, as revealed by Tribune Business, warned the global capital markets that the Bahamas' fiscal condition is "significantly worse" than expected due to the new government's planned $722 million borrowing - intended in part to cover the expanded $500 million deficit for 2016-2017.

With rating agency trust in the Government's fiscal projections seemingly undermined, the Bahamas' sovereign credit rating will rely heavily on the Minnis administration's ability to provide a convincing explanation for the increased borrowing and deficits to remain at its current level.

Mr Ward yesterday said "there's a direct cost of capital imposed" on private companies by sovereign rating downgrades, explaining: "You have got to provide more capital to sustain a level of rating that would not have resulted if our sovereign rating was in good shape."

The Bahamas First chief also alluded to the "long-term impact if the Government's debt is written down", given that insurance and bank balance sheets are loaded with bonds and other debt for asset-liability matching purposes.

"I hope they're going to take a measured approach," Mr Ward added of the rating agencies, "and give this new administration an opportunity, but who knows."

Mr Ward said further exchange control liberalisation was key to Bahamas First's ability to both expand into other countries and diversify its investment returns.

"It's central to our focus in terms of expanding our footprint," he explained. "It makes the whole proposition to expand our footprint easier."

Glen Ritchie, Bahamas First's group vice-president and chief financial officer, recalled how the company had waited two months to obtain Central Bank approval to increase its equity stake in its Cayman affiliate, Cayman First.

He emphasised that had Bahamas First been competing with rivals to make such an investment, the wait for exchange control approval could have cost it the deal.

The exchange control regime has long been viewed as an obstacle to Bahamian companies expanding into other Caribbean nations. Mr Ward said it placed local firms at a competitive disadvantage to Caribbean rivals, some of whom - enjoying liberalised capital markets - were moving into this nation.

He argued that further exchange control liberalisation would also enable Bahamas First to diversify its investment portfolio and earn potentially greater returns, while reducing geographical risk associated with the current restrictions to this nation.

Mr Ward said investments abroad by Bahamian companies would ultimately benefit this nation by bringing foreign exchange earnings back to these shores.

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Bahamas 'Cannot Afford' More Rating Downgrades - Bahamas Tribune