by Richard Coulson
Mr. Coulson has had a long career in law, investment banking and private banking in New York, London, and Nassau, and now serves as director of several financial concerns and as a corporate financial consultant.
The Bahamas International Securities Exchange (BISX) has become a well run organization that could make a major contribution to our economy, if it can overcome a combination of Government inertia and under-utilization by the private sector.
It has come a long way since incorporation with great fanfare in 1999 financed solely by some 45 institutions and individuals, followed by near bankruptcy when its directors approved grandiose headquarters, a costly foreign boss, and other inflated expenses unmatched by modest revenues from local share listings. After lengthy negotiations, the initial shareholders provided a new round of financing, and in 2006 the Government put in more cash and retired debt to acquire 43% of BISX’s equity capital. Staffing and premises were shrunk, and a sophisticated trading platform was installed, all under the able leadership of Bahamian CEO Keith Davies. Operations have nearly reached break-even over the last two fiscal years.
But these improvements were premised on Government making certain fundamental policy changes that would enable BISX to play a larger role in our securities market. These were set forth in a Policy Statement issued in August 2005, reflecting recommendations drafted by a special committee of the Ministry of Finance.
Unfortunately, of the eight points in the Policy Statement, the two most significant ones still have not been put into effect. These points unambiguously provide that all debt securities issued by Government or public corporations will be listed on BISX, and that the Central Bank will implement a market-based system for underwriting and trading all public offerings of these securities.
We would see an end to the archaic system whereby the Central Bank merely announces a new issue of Government stock at a set price and interest coupon and waits for buyers to come to its doors. There is no price competition, and while some individuals take the trouble to apply, the large majority is snapped up by institutions who rarely trade it. Some $2 billion of Government debt is outstanding in the form of little pieces of paper, instead of electronic recording in the central register already developed by BISX.
Under the new system centered in BISX, our experienced broker-dealer Exchange members, and others who chose to step up, would handle the original placement of public registered stock and T-bills so that government financing needs would be met promptly, and the brokers’ ability to trade securities between investors would provide continuing liquidity, which should be a prime function of any government securities market.
In the first quarter of this year the Central Bank reached full agreement about BISX’s technical competence in this field, and so advised the Ministry of Finance. But Government procrastinates in authorizing the changes, so new debt has still been issued under the antiquated arrangements. Perhaps mandarins in the public service are reluctant that power may slip from their hands, or that private-sector dealers may increase their earnings through trading commissions. These concerns should give way to the undoubted benefit that our economy would enjoy from the new system, which is used in most countries with active capital markets. Government’s recent nomination of two experienced financial executives, George Farrington and Simon Wilson, to the BISX Board of Directors suggests that official thinking may be moving in this direction. The move cannot come too soon.
Government can also support BISX by approving the application of brokers CFAL and Fidelity to each acquire US$3.125 million official reserves, for use in buying foreign securities without the burden of the 12.5% “investment premium”. These securities would be placed in BISX-listed mutual funds offered locally, thus permitting Bahamians for the first time to invest abroad without exchange risk.
The private sector can also contribute to BISX’s greater relevance in our economy. The Exchange has been successful in listing the corporate securities of 18 local companies, plus a foreign BDR (Bahamian Depositary Receipts), although one of our largest public firms, Bahamas Supermarkets, still refuses to list. These 19 listed firms have a total market capitalization of $3-$4 billion, but probably more than 75% of this amount is locked up in hands of the controlling owners and does not trade. The remaining 25% is held by an estimated 12,000 -14,000 Bahamian shareholders. In general, they have enjoyed a good ride: the BISX all-share index is up 14.32% this year and a total of 91.5 % since it was initiated in December 2001. In some weeks, over 50,000 shares have traded – still a modest amount, but gradually increasing.
However, even in our growing and dynamic economy, listing of new companies on BISX has stagnated. Although several secondary equity issues came to market and a number of debt and preference shares are seeking to be listed, since 2001 only two IPOs have been completed, and they were the BDRs of foreign companies (one was redeemed, giving a nice profit). Both investors and potential issuers seem to have lost confidence in the public securities markets and are unwilling to tap it again with new names. This fear looks pretty irrational. Three or four companies quoted on BISX have enjoyed substantial increases of their share prices, while most of them have shown steady growth or stability and only a few have seriously disappointed investors. This is a normal mix for shares on any stock exchange, and should not deter solid companies from going public.
Many privately owned enterprises here might be able to show the profitability, size and stability to attract new shareholders in an IPO – firms such as Kelly’s Home Centre, SuperValue Food Stores, Mall at Marathon, John Bull, Furniture Plus, Commonwealth Brewery, A.I.D., Bahamas First, and Bahamas Food Services. Of course, private owners cannot be persuaded to “go public” just to satisfy BISX; they must have a sound financial reason to do so. Either they need to issue new equity to raise capital for expansion, or they wish to achieve personal liquidity by selling their own shares. In the Bahamian tradition of tightly held family companies, the owners often have an obsession against exposing their business to new shareholders and maybe “losing control”. They fail to appreciate that the capitalized value of a publicly quoted company is much higher than simply its book value as a private company. Gradually, we may expect to see more IPOs, as second or third generation heirs want to enjoy the fruits of their ancestors’ business acumen.
To satisfy the investment appetite of newly affluent Bahamians, BISX must offer a wider variety of opportunities beyond the present 19 companies. On top of our existing mutual funds, two life- insurance companies have recently announced they will offer equity funds to their policy holders. We can foresee too much demand chasing too few shares unless the market is opened up. BISX is commendably trying to develop a second-tier market for newer, smaller companies, but we predict limited success in selling such names given the innate conservatism of most Bahamian investors. We are far from having a venture capital class willing to accept a higher degree of risk. BISX may get better results by aggressively marketing its services to the type of blue-chip companies mentioned earlier, or by encouraging locally-based foreign firms to issue BDRs.
Once Government debt is traded, and more private companies are listed, BISX will enjoy profits to achieve its wider objectives of nationwide market education and, eventually, trading foreign securities. The success of BISX is not an end itself, but rather a vital step towards creation of a multi-tiered financial center and a growing, diversified economy.
