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Govt must keep Clico bonds promise

Saturday, November 12, 2011

The Government announced this week that it proposes to raise up to $1.5 billion by way of a 20-year bond with a coupon rate of six per cent. This bond, according to the information memorandum on the Central Bank’s Web site, is being issued to finance payouts to Clico policyholders. The publication of the information memorandum is the first positive news that policyholders would have had in some considerable time that the Government actually intends to implement the bailout proposal that the Minister of Finance, Winston Dookeran, first ventilated more than a year ago in his 2011 budget presentation. 

In that statement, Mr Dookeran said: “The cost of the payment of $75,000 to all short-term investment and mutual fund depositors is estimated at $1.5 billion over the next four years, as payments become due. Given the 2011 budget statement from the Minister of Finance, it can be assumed that the $1.5 billion that the Government proposes to raise on November 22 will be used to pay $75,000 across the board to the individuals and institutions who invested money with Clico and British American in what has been described as short-term investment products (STIPs). This includes the mutual funds and the controversial Executive Flexible Premium Annuities.

Reports in this newspaper state that the amount of money that was invested in these STIPs amounted $12.3 billion. Given that some holders of these STIPs received payments of over $2 billion in 2009 and 2010, the $1.5 billion that the Government proposes to raise will constitute about 15 per cent of the outstanding investment of $10.2 billion. The payment of $75,000 across the board is the first of a three-stage process by which the Government proposes to pay the holders of the STIPs with investments above $75,000. The second stage involves issuing zero-coupon bonds to the holders of the STIPs with investments above $75,000 for the first ten years of the proposed 20-year period of the zero-coupon bonds.

The third stage involves issuing units in a trust fund to the holders of the STIPs “who have exercised the option to exchange their bonds with maturities of years 11 to 20,” according to a statement by Mr Dookeran during the presentation of the 2012 budget. The trust fund would be backed by the 51.7 million shares in Republic Bank owned by Clico. Those shares were worth $4.9 billion at the close of yesterday’s trading. The decision by the Government to raise $1.5 billion to finance the Clico policyholders raises several issues.

Firstly, the length of time the process has taken and will take. The initial proposal by this administration to resolve this matter was made 14 months ago, during the 2011 budget speech. At that time, the Minister of Finance also announced that the Government was stopping with immediate effect the payment of interest on the investments. That decision caused the deterioration in the quality of life of a large number of policyholders as well as a certain degree of uncertainty among investors, both local and international, who would have been alarmed by the Government’s unilateral policy. The process is likely to take at least another year as government spokesmen have said that the process of putting the investment trust company together could take a year.

The second issue is the extent to which the raising of the $1.5 billion will affect the country’s debt profile and whether the Government has a plan to finance the zero-coupon bonds when they become due. Finally, there is the need for communication by the Government to explain the advantages and disadvantages of zero-coupon bonds and investment trust companies. While the issuance of a cheque or a money transfer for $75,000 is straightforward, policyholders would have many questions surrounding the Government’s proposal to issue zero-coupon bonds and units in an investment trust company. It is hoped, therefore, that the Government fulfils the promise made by Mr Dookeran that the “exchange of the bonds and any potential risks associated with this market-based instrument will be properly explained to investors through a sustained communication plan.”


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