Risky returns on Caribbean government bonds
Current risk in Caribbean government bonds not adequately reflected in yields says Fortress Fund Managers.
BRIDGETOWN, Barbados, Thursday May 17, 2012 – The huge losses suffered by investors in the recent St Kitts and Nevis debt exchange signals a need for government debt issues in the Caribbean to adequately compensate investors for the risks involved.
This suggestion was sent by the Barbados-based Fortress Fund Managers in their recently issued first quarter report on the performance of their funds over the first three months of 2012.
In their report on their Caribbean High Interest Fund, Fortress noted that indications were that the St Kitts and Nevis debt restructuring could see bonds drop 70 to 80% in value post-restructuring. The fund managers likened the situation for investors in these bonds to the hardships being suffered by investors in Greece, who similarly saw the face values of their bonds plummet as part of a massive debt write down to help stabilise that failing Eurozone economy.
In their report, Fortress said it was “still quite concerned that prices of some Caribbean government debt fail to reflect their true risks – especially with the examples of Greece and St Kitts right in front of us”.
Fortress, which carries a mix of private and public equities in its various portfolios, said these recent events underscored the importance of yields that were set at a level that offered appropriate compensation for risks taken.
In its report on its Caribbean Growth Fund, Fortress noted that Caribbean stocks retreated slightly during the first quarter as some major companies reported lacklustre earnings as business conditions remained challenging in some sectors.
The fund manager highlighted the challenges faced by the commercial banking sector as a result of loans offered during the relative buoyancy of 2007 and 2008, which were now non-performing. Fortress noted that the banks now had to set aside reserves against these non-performing loans, which was reducing their earnings power.
Fortress said, while the ability of these banks to earn money was improving, it was happening slowly as the institutions were “still fighting headwinds”.