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Bpl’S $650m Bond Cost ‘Hinges’ On Credit Rating

By NEIL HARTNELL

and YOURI KEMP

Tribune Business Reporters

The cost of Bahamas Power & Light’s (BPL) $650m refinancing “hinges” on the credit rating it is seeking from international agencies, Tribune Business was told yesterday.

Geoff Andrews, chairman of the special purpose vehicle (SPV) that will issue the bonds to restructure BPL’s legacy debt and liabilities, confirmed to Tribune Business that such an assessment was being sought to validate ability of the utility and its customers to repay the debt that will be owed to investors.

He revealed that himself and Dr Donovan Moxey, BPL’s chairman, had met with the rating agencies - the likes of Fitch, Moody’s and Standard & Poor’s (S&P) - last week in New York to make the case as to why the upcoming National Utility Investment Bond issue should receive an “investment grade” rating indicating that the borrower is sufficiently strong with good creditworthiness.

“We did have some meetings in New York, and we all felt - and our advisors told us - the meetings seemed to have gone well and were well received,” Mr Andrews said. “We were meeting some of the rating agencies.

“This discussions focused not only on BPL but just where The Bahamas stood in general. It’s a real education process to get people to understand that while Dorian did a lot of damage in Grand Bahama and Abaco, the rest of The Bahamas is in pretty good shape and trying to move forward. BPL doesn’t have any operations in Grand Bahama. Of course, they were heavily impacted in Abaco.”

Obtaining a strong, “investment grade” type rating for the bond issue is critical for Bahamian households and businesses as this will determine the price (interest rate) that will be attached to these debt securities.

Much like how the rating agencies assess The Bahamas’ sovereign creditworthiness, an ‘investment grade’ rating indicates confidence in a borrower’s ability to repay its debt and ensures access to lower-cost debt capital, whereas a so-called ‘junk’ rating - like this nation has now from S&P - will result in having to pay investors higher interest rates to compensate them for the increased risk.

This an ‘investment grade’ rating for the BPL bond will result in lower-priced debt that is issued to investors. This, in turn, means that the amount BPL’s Bahamian customers will have to pay to service the debt is less as the bond servicing fees attached to their bills will be lower.

However, if the BPL bond can only obtain a ‘junk’ rating this will increase the price demanded by investors, meaning Bahamian households and businesses will have to pay higher bond servicing fees. “It hinges on the rating we get,” Mr Andrews confirmed to Tribune Business of the bond’s pricing.

His comments also indicate how national developments and events, such as Dorian, can impact credit ratings. Something similar happened to the Nassau Airport Development Company (NAD) in early when it lost the ‘investment grade’ rating with Fitch for its $409.5m borrowings because S&P downgraded this nation’s sovereign debt.

Some observers are also likely to query whether the National Utility Investment Bond will attract a strong credit rating given that BPL has yet to implement the necessary reforms to ensure a financial turnaround, but Mr Andrews yesterday voiced optimism that the $650m will be fully subscribed.

Confirming that the rating is being sought before potential investors are pitched prior to year-end 2019, the former Deloitte & Touche (Bahamas) accountant and partner, who also chairs the Small Business Development Centre (SBDC) initiative, said: “At this time we are still confident we will be able to get it fully subscribed.

“We are definitely making progress. Clearly, Dorian has set us back a little bit in terms of the timing of it, but we’ve been able to make some real good steps in the last couple of weeks and meeting with the rating agencies was an important part of the process.”

Mr Andrews said Bahamians were too focused on the extra bond servicing charge and missing the ‘bigger picture’ that was yesterday outlined by Dr Moxey, who predicted that the combination of BPL’s new 132 Mega Watt (MW) engines and Shell’s proposed multi-fuel power plant will ultimately lower electricity costs by 50 percent compared to present levels.

Confirming that it was “certainly the plan” that these savings far surpass the debt servicing costs imposed on consumers, Mr Andrews said: “It’s come off as if this was just going to be another fee added to the cost of electricity bills when it’s much more important to come up with a long-term stable supply of electricity at stable, predictable costs.

“One of the participants in the seminar said the cost of electricity has been one of the biggest to potential investors in this country for 20 years....As Donovan said in his presentation this is the first time anybody has taken a long-term view to fix the problem instead of putting a band-aid on something that has existed for 20 years.”

Dr Moxey, too, was unable to specify how much consumers will pay to service the new $650m debt. He did, though, tell the Accountants Week conference that BPL’s new Wartsila engines could produce a 30 percent reduction in electricity bills by enabling the utility to switch its fuel from more expensive “crude oil” to “heavy oil”.

And the BPL chairman added that as Shell’s proposed multi-fuel plant comes on stream and introduces liquefied natural gas (LNG) to the energy mix, consumer bills will be cut by a further 30 percent- making for a 50 percent reduction in total.

Dr Moxey said the bond issue will enable to smooth electricity bills for consumers for at least five years, and perhaps even longer, through “rolling hedges” to further keep rates at a flat, low level.

So-called rolling hedges mitigates against market fluctuations caused by unexpected rises in fuel prices, which lead to big swings in customer electricity bills. “What we want to do is create ‘price certainty’ and ‘price stability’,” Dr Moxey added, promising to get rid of BPL’s reliance on Aggreko’s rental generation within 12 to 18 months.

Turning to Abaco restoration, he said power has been restored as far as Crown Haven, and from Wilson City down to Sandy Point. The only part of the island not on-line is Marsh Harbour and some of the surrounding cays.

Dr Moxey added: “The total cost to restore and repair Abaco power is estimated to be between $80m and $90m, with about $50m of that just to repair the transmission and distribution system alone.” He said BPL is also looking at providing “microgrids” for locations such as Elbow Cay.

Revealing that BPL ultimately wants to exit power generation entirely, Dr Moxey said it will mandate that all generation companies, including Shell North America, will have to use the fuel supply of its choice.

The BPL chairman also blamed the utility’s struggles on the 2004 cut to its ‘base’ tariff, which generates its profits and cash flow, adding that this had cost it some $180m over the years. “Previous BPL boards instituted a rate-cut without a rate study that caused the company an average of $15m a year in losses from 2005 up to 2018, causing BPL to incur a $321m debt,” he said.

Comments

Porcupine 2 months ago

There is little in this article to suggest that Bahamians will be any better off after this "deal" is done. There is the real "cost of doing business" associated with any business. Now, add to that widespread incompetence, malfeasance, theft and corruption which we know for sure was going on for years and years and years. The summation of all these extra costs, with long term financing for profit to the financiers on top of that, and we have a situation whereby the people, remember it's the people's time, get to foot the bill for every last cent of this failure called a corporation. Who can say this is not a failure, despite how the current leaders of BPL spin it? It wasn't Dorian who threw a wrench in the works. It was years and years of total dishonesty which got us where we are today. "Junk bond" vs. "investment grade" is really just a diversion. Just as relying on fossil fuels for our future energy needs is archaic and irresponsible leadership. Are we truly incapable of seeing how badly we are being treated by those who get paid to attend to the Bahamian people's interest? Sure seems so.

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Well_mudda_take_sic 2 months ago

Only a fool would invest in the bonds before BPL is privatized and put in the hands of a good management team with a proven track record. And its a given that BPL will never be profitable as long as it is subject to government and union interference of any kind.

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stocktonfuller 2 months ago

If BPL's bonds are ever rated investment grade, I would suggest that the rating have either lost their way or they have accepted giant bribes

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Dawes 2 months ago

Everyone knows that once this deal is done and with an election coming BPL will be used yet again to employee voters. In 10 years we will be back to square one with an even bigger debt to pay. All Governments have been very quick to tax/charge us to make up for shortfalls they have (or the quasi companies have) but never deal with the issue that got us there. As such if i was rating the bond it would be at the worthless level.

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