Manley monument to symbolise equality
Tuesday, December 11, 2001
THE National Road Operating and Constructing Company (NROCC), the vehicle being used by the government to manage its interest in Highway 2000, will tomorrow launch a $3.5-billion bond to raise cash to help finance the first segment of what is to be Jamaica's first toll road.
What NROCC is now taking to market represents 70 per cent of the US$107-million (J$5.02 billion) that the government is to raise in Jamaica for on-lending, on a commercial basis, to Bouyges, the French construction company that won concession to build, own and operate the road for 35 years. It was not immediately clear when NROCC will go to market for the remaining $1.5 billion that it is committed to source for the project.
This 74-kilometre segment of the highway, from Kingston to Williamsfield in Manchester, will cost US$390 million. Bouygues itself is to find US$283 million, or nearly 73 per cent of the cost, equity and debt. Bouygues is committed to putting up at least US$40 million in equity.
The instrument that NROCC is placing on the market will have a 30-year maturity -- the longest in the island's history -- and is being seen by its offerers as an opportunity to develop a market in long-term instruments, pitched primarily to institutions with a long horizon. The offer will be open for two weeks.
NROCC and its team of financial advisers -- Dehring Bunting & Golding (DB&G), Investment Masters Ltd and PriceWaterhouseCoopers (PWC) -- have been courting the over $40-billion pension fund management industry and other long-term investors for the past two years.
They argue that the NROCC bond will satisfy the need for a long-term investment instrument to match the long-term liabilities of several institutions, such as pension fund managers and building societies.
"In 1998, a survey was conducted looking at the market for long-term savings -- particularly building societies and pension funds," explained John Lee, senior partner at PWC. "...One of the things we found was that pension funds were investing in short-term funds."
"One doesn't know what the future brings, so rather than taking the risk of going short, you should diversify your portfolio," added Lee.
Development Bank of Jamaica executive director, Kingsley Thomas, who conceived the highway, said the bond would represent a major revolution in the way money was invested in Jamaica.
"It is really bell-wether in how we deal with the use of investment funds in Jamaica," said Thomas.
Members of the Highway 2000 team told journalists at a news conference yesterday that the group had, over the period, conducted intensive market surveys and research to arrive at an ideal design for the bond.
The result is this 30-year, tax-free, inflation-indexed and government-guaranteed instrument that will make a real 4 1/2 per cent interest payment semi-annually. In addition, at the date of redemption, the bondholder will have the option of exchanging the principal payment for shares in the company.
An inflation indexation is seen as a crucial feature in the make-up of the bond to ensure that the value of interest and principal payments are not eroded by price increases over the 30-year period.
To index the bond to price movement, the principal will be adjusted upward on the basis of inflation for the period, upon which subsequent interest payments will be based.
"Basically, the principal is adjusted for inflation, whatever the amount the inflation goes, so will the value of the bond," explained Mark Walters, investment manager at DB&G.
Walters said the decision to index the bond to inflation was seen as the best way to secure the value of payments to investors, several of whom had favoured tying payments to the exchange rate.
Lee, admitted that the team had some difficulty convincing investors that by matching inflation they would also hedge against the devaluation.
In fact, Lee said the team had to use graphs to show that over the past 20 years, inflation and devaluation have tracked each other almost identically. Furthermore, over the past 30 years, a bond that was linked to inflation would have outperformed one tied to treasury bills.
The investors have reportedly been sold on the virtues of the Highway 2000 bond. Lee told journalists that the response from investors has been "surprisingly good".
"At the moment, all the indications are that the instrument should be oversubscribed," said Lee.
Bouygues has projected inflows to NROCC of US$1.68 billion over the 35-year contract period.