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The Gleaner - August 25, 2000


FINSAC bill nears $130b

THE entire bill for bailing out the financial sector is now close to $130 billion, according to the latest figures.

At the end of June this year the Financial Sector Adjustment Company (FINSAC) had shelled out $127.9 billion on dealing with the crisis in the financial sector. Interest on the gross or overall bill is expected to be $16 billion in the year to the end of March 2001.

"Of the $127.9 billion in FINSAC securities outstanding at June 30,2000, the Bank of Jamaica, the Ministry of Finance and Planning and other governmental agencies hold $50.0 billion, which the Government has agreed to cancel," according to the latest preliminary offer memorandum for a proposed bond US dollar issue expected to emerge any day now.

This would leave the Government almost $78 billion to shoulder directly when it takes FINSAC's debts on to its books next April.

The latest figure is substantially higher than the $107 billion gross obligations of FINSAC at the end of March, with some $22 billion now added to its commitments.

In his recent memorandum to the International Monetary Fund (IMF), Dr. Davies said he expected the Government to take $73.6 billion of FINSAC debt on to its books next April and that interest payments would cost around 3 per cent of gross domestic product (GDP) or close to $9 billion.

Yesterday The Gleaner revealed that Finance Minister Dr. Omar Davies was poised to return to the international capital market in a few days in a bid to raise US$200 million.

A day earlier FINSAC boss Patrick Hylton confirmed that Guardian Life was poised to get St. Mary's Boscobel Beach hotel as part of its assets, although a potential buyer for the property was unable to get information on the property in order to make an offer after weeks of waiting.

The preliminary offer memorandum obtained by the Financial Gleaner showed that US investment house Bear Sterns will be the lead manager on the proposed US$200 million bond issue, which is expected to have a seven-year maturity. The deal has not been priced but US sources said that it could yield around 13 per cent for investors buying the bonds. Credit Suisse First Boston and Deutsche Bank Alex Brown will be co-managers to the offer.

Local fund managers suggested that the deal could emerge as early as Friday. They were surprised at the proposed 13 per cent pricing of the new bond.

In July the Government had looked at raising US$250 million but a subsequent issue from Argentina saw support for that bond issue ebb away.

The Finance Minister said in April during his Budget presentation that he would raise US$400 million in the international capital market to help finance the $167 billion spending programme he outlined.

The expected 13 per cent yield led to a sell-off in existing bonds issued previously by the Government, as some investors moved to position themselves for the latest issue.

The latest offer document says: "FINSAC has financed its operations through the issuance of Government-guaranteed securities, of which $127.9 billion, inclusive of accrued interest, remained outstanding at June 30,2000. Payments due during FY 2000/01 total approximately $16.0 billion, with $1.2 billion to be paid in cash and the remainder to be capitalised.

"In FY 2000/01, the cash payments will be financed by FINSAC from the sale of assets and the collection of non-performing loans. At the beginning of FY 2001/02 the Government expects to assume all remaining FINSAC liabilities and to begin making all interest payments in cash."

The memorandum adds: "In FY 1999/2000, FINSAC determined that a major insurance company needed FINSAC assistance in addition to assistance that FINSAC previously provided. FINSAC and this insurance company are currently assessing the size and nature of such assistance". The company in question is thought to be Life of Jamaica (LoJ).

"As of March 31, 2000, FINSAC held loans to financial institutions with a net book value of $4.0 billion and holdings in financial institutions and other investments with a net book value of $23.0 billion."

According to the memorandum: "As part of the restructuring and reorganisation of the financial sector, FINSAC has established the Non-Performing Loan Unit for the collection of non-performing loans it acquired from financial institutions, and has collected $3.6 billion against this portfolio of non-performing loans since 1998."

"FINSAC has also been involved in the restructuring of insurance companies, including the facilitation of a US$6.0 million majority investment by Barbados Mutual Life Assurance Society in Island Life Insurance Company Limited."

The restructuring company's divestments began in early 1998 with the sale of a number of the assets that it acquired, including the former Courtleigh Hotel property and the non- core businesses of Citizens Bank of Guyana.

In 1999 FINSAC completed the sale of the insurance portfolios of Mutual Life, Crown Eagle Life and Dyoll Life to eight life insurance companies from Jamaica, Barbados and Trinidad, for a total price of US$12.3 million.

Guardian Holdings of Trinidad picked up the lion's share of the insurance business, the individual life portfolios of the three companies.

Last year FINSAC sold six hotels, some insurance companies, real estate holdings and other assets, yielding total proceeds of US$178.1 million.

"FINSAC is now at an advanced stage of negotiations for the sale of its 99 per cent stake in Union Bank to a regional banking group (Royal Bank of Trinidad & Tobago), and anticipates that the sale will be finalised by the end of August 2000."

Union Bank was created by FINSAC in April 1999 from the merger of several financial players - four commercial banks, five merchant banks and four building societies - with total assets of $28.7 billion.

"During the remainder of 2000, the Government intends to make considerable efforts to divest the stakes held by FINSAC in certain other assets, including its holdings in National Commercial Bank."

The detailed memorandum adds: "On June 21, 2000, the staffs of the Inter-American Development Bank (IDB), the World Bank and the Caribbean Development Bank announced their intention to propose to their respective Executive Boards a loan package to Jamaica totalling US$325.0 million.

"The proceeds of these loans would be used to redeem some of the FINSAC debt. The loan package would reduce the Government 's debt servicing costs because the interest rates on these loans is significantly lower than that of the FINSAC debt. There can be no assurances that such financing will be extended to Jamaica, and the financing is subject to conditions, including the Government's agreement to an IMF Staff Monitoring Programme.


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