On Jan­u­ary 18, 2024, the Min­istry of Fi­nance is­sued a news re­lease an­nounc­ing that the Na­tion­al In­vest­ment Fund (NIF) Hold­ing Com­pa­ny Ltd would launch NIF2, which is a five-year bond with a face val­ue of $400 mil­lion, of­fer­ing in­vestors a re­turn of 4.5 per cent per year.

The bond is backed by 6,546,417 shares of Re­pub­lic Bank Fi­nan­cial Hold­ings Ltd (RFHL), which were ac­quired by NIF from the Gov­ern­ment of the Re­pub­lic of Trinidad and To­ba­go on No­vem­ber 20, 2023, ac­cord­ing to a no­tice is­sued by the NIF board of De­cem­ber 8, 2023.

NIF2 was launched on Jan­u­ary 22 and closed on Feb­ru­ary 9, last Fri­day. On that date, RFHL had 163,705,258 shares in is­sue, which meant that the 6,546,417 RFHL shares owned by NIF ac­count­ed for 3.99 per cent of the bank hold­ing com­pa­ny.

On Fri­day as well, RFHL shares closed at $121.67 a share, which means that the shares back­ing NIF2 were worth $796.50 mil­lion, pro­vid­ing just short of twice the val­ue of the $400 mil­lion bond.

The NIF2 bond was sold in de­nom­i­na­tions of $1,000, which means some­one in­vest­ing $1,000 would re­ceive in­ter­est of $45 a year ($1,000 X 0.045), which would be paid se­mi-an­nu­al­ly in Au­gust and Feb­ru­ary.

To de­ter­mine whether NIF2 is a good in­vest­ment, let us use ex­am­ples of two teach­ers, Ms Singh and Mr Smith, whose ser­vice al­lowed them to each re­ceive $122,000 in back­pay last year. Ms Singh used all of her back­pay mon­ey to pur­chase NIF2 bonds, while Mr Smith used all of his back­pay mon­ey to ac­quire shares in RFHL. Both made their in­vest­ments on Feb­ru­ary 5, which would have been last week Mon­day.

So to­day, in the­o­ry, Ms Singh would have ti­tle to 122 NIF bonds, for which she would have paid $122,000, while Mr Smith would own 1,000 RFHL shares, for which he would have paid $121,364 (fees in­clud­ed). By my cal­cu­la­tion, Ms Singh would re­ceive $2,745 in Au­gust 2024 and $2,745 in Feb­ru­ary 2025, for a to­tal 12-month in­ter­est pay­ment of $5,490 (which is 122 X $45).

She would re­ceive those sums of mon­ey every year un­til 2029, when she would re­ceive her ini­tial in­vest­ment of $122,000 trans­ferred di­rect­ly in­to her bank ac­count. The $5,490 12-month in­ter­est pay­ment is vir­tu­al­ly risk -free and is fixed, mean­ing she is en­ti­tled to no more or less than her se­mi-an­nu­al pay­ments.

On the oth­er hand, Mr Smith holds an in­vest­ment that is riski­er than Ms Singh’s:

1. The val­ue of his ini­tial in­vest­ment of $121,364 (to pur­chase the 1,000 RFHL shares) could go up or down, giv­en the volatil­i­ty of the share price of the fi­nan­cial hold­ing com­pa­ny’s stock on the T&T Stock Ex­change;

2. The div­i­dend paid by RFHL is al­so sub­ject to change, based on the per­for­mance of the bank. RFHL made two div­i­dend pay­ments in 2023 to­talling $5.20 per share with $1.10 be­ing paid on May 31 and $4.10 on De­cem­ber 1.

If RFHL pays a div­i­dend of $5.20 again in 2024, Mr Smith would re­ceive a to­tal of $5,200 (1,000 X $5.20) from the bank.

His div­i­dend pay­ments from RFHL would be $290 less than Ms Singh would re­ceive for hold­ing the NIF bond ($5,490-$5,200).

But if RFHL in­creas­es its to­tal div­i­dend to $6 per share in 2024, which is 15.5 per cent more than its 2023 pay­ments, Mr Smith would re­ceive $510 more than Ms Singh ($6,000-$5,490). And 15.5 per cent is the ex­act in­crease of RFHL’s div­i­dend in 2023 com­pared to 2022.

Al­so, be­cause last year RFHL de­cid­ed to pay div­i­dends four times a year, in­stead of twice a year, Mr Smith should re­ceive the bank’s $0.55 a share first quar­ter div­i­dend ($550) in his bank ac­count on Feb­ru­ary 29. He is like­ly to re­ceive three more div­i­dends this year.

There is al­so the pos­si­bil­i­ty that the RFHL share price could in­crease in 2024.

Would you, read­ers, choose to in­vest in the NIF2 bond or in its un­der­ly­ing as­set, RFHL shares?

At­trac­tive in­ter­est rate?

At a vir­tu­al news con­fer­ence last No­vem­ber, Min­is­ter of Fi­nance, Colm Im­bert, said the Min­istry of Fi­nance was work­ing on for­mal­is­ing and fi­nal­is­ing NIF2 by the end of 2023.

He said the ini­tial NIF, which com­prised bonds of five years (Se­ries A), 12 years (Se­ries B) and 20 years (Se­ries C) was very suc­cess­ful and that the five-year bond was par­tic­u­lar­ly at­trac­tive to peo­ple on the low­er end of the in­come pyra­mid.

“The 20-year bond was picked up most­ly by in­sti­tu­tions like in­sur­ance com­pa­nies and so on, while 12-year bond was picked up by wealthy in­di­vid­u­als. The five-year bond was picked up by your or­di­nary in­vestor,” said Mr Im­bert.

Now, with an in­ter­est rate of 4.5 per cent, the Feb­ru­ary 2024 five-year NIF2 bond has ex­act­ly the same rate as the Au­gust 2018 Se­ries A bond.

Ac­cord­ing to in­for­ma­tion on the Cen­tral Bank web­site, in June 2018, when the ini­tial NIF was be­ing priced, the in­dica­tive yield on a five-year Gov­ern­ment bond was 3.53 per cent.

That means the ini­tial five-year NIF bond had an in­ter­est rate that was 97 ba­sis points more than the yield curve.

In De­cem­ber 2023, the five-year yield curve was at 4.22 per cent.

For me, there­fore, the in­ter­est rate for NIF2 should have been set at 5.20 per cent to be deemed very at­trac­tive.

In a state­ment dat­ed Sep­tem­ber 22, 2023, on the NIF web­site, the Min­istry of Fi­nance gave no­tice that, giv­en the ma­tu­ri­ty of the Se­ries A (the five-year) bond on Au­gust 9, 2023, it went ahead and is­sued a $1.2 bil­lion, 17-year, fixed-rate bond pay­ing 7.10 per cent on Ju­ly 26, 2023 to re­fi­nance the Se­ries A (five-year) bond.

“The pro­ceeds from the is­sue of the Se­ries D Bonds were used to make pay­ments to the hold­ers of the Se­ries A bonds up­on ma­tu­ri­ty,” ac­cord­ing to the Min­istry of Fi­nance.

In oth­er words, the Gov­ern­ment re­fi­nanced a five-year bond pay­ing 4.50 per cent a year, with a 17-year bond pay­ing 7.10 per cent.

So in Ju­ly 2023, T&T’s pen­sion funds, in­sur­ance com­pa­nies and mu­tu­al funds got the op­por­tu­ni­ty to ac­quire a 17-year Gov­ern­ment bond pay­ing 7.10 per cent, but in Feb­ru­ary 2024 the op­por­tu­ni­ty af­ford­ed to the coun­try’s “small” in­vestors was to par­tic­i­pate in a five-year bond yield­ing 4.50 per cent, at 28 ba­sis points more than the five-year yield curve.

Com­po­si­tion of NIF2

On Oc­to­ber 7, 2019, in de­liv­er­ing the 2020 bud­get, Mr Im­bert said:

“NIF is a sig­na­ture achieve­ment of this PNM Gov­ern­ment, giv­ing back to tax­pay­ers, as we promised, sig­nif­i­cant re­turns on pub­lic funds used in the bailout of Cli­co.

“Madam Speak­er, we will con­tin­ue to use this ve­hi­cle as a mech­a­nism for mon­etis­ing ma­jor state as­sets, in­clud­ing those as­sets trans­ferred to the Gov­ern­ment for re-pay­ment of the cost of the CL Fi­nan­cial/Cli­co bailout.

“Bar­ring un­fore­seen cir­cum­stances, I pro­pose to in­tro­duce in fis­cal 2020 a sec­ond Na­tion­al In­vest­ment Fund bond is­sue which will be based, among oth­er things, on the pro­ceeds from the sale of cer­tain shares held by Cli­co that are cur­rent­ly val­ued at $2.6 bil­lion. We will main­tain the cur­rent ra­tio of 2:1 re­lat­ing to the as­sets and the cor­po­rate bonds is­sued by the first Na­tion­al In­vest­ment Fund.”

Mr Im­bert was re­fer­ring to Cli­co’s 56.53 per cent share­hold­ing in Methanol Hold­ings (In­ter­na­tion­al) Ltd (MHIL).

On April 25, 2023, Min­is­ter in the Min­istry of Fi­nance, Bri­an Man­ning, told the Sen­ate of the Gov­ern­ment’s plan for Cli­co to sell NIF 17 per cent of MHIL and for the Gov­ern­ment to ac­quire 19.63 per cent of the Oman-based com­pa­ny.

In my view, NIF2 would have been a far more at­trac­tive in­vest­ment if it had the MHIL shares avail­able to it.