Simpson Bay:--- There was no big fanfare when the Princess Juliana International Airport (SXM) recently formalized the closing of its US$132 million bond issue in New York City, despite the fact that the St. Maarten delegation that attended the ceremonial event included two cabinet ministers: Minister of Tourism, Economic Affairs, Transport and Telecommunications, Hon. Romeo Pantophlet, who also has responsibility for the airport; and Minister of Finance, Hon. Roland Tuitt.
There was no big to-do either when the delegation returned home, after securing such a huge financing on the international money market, despite the fact that the amount is about half the draft St. Maarten government budget for 2013.
It was business as usual, even when representatives of the underwriters of the bond, Nomura Securities International Inc., one of the world's leading independent investment banking firms with headquarters in Tokyo, Japan, and of Cigna, a global health insurance company and one of the largest health service companies in the US, which invested US$30 Million in the SXM bonds, visited the island following the closing of the bond issue.
"This is in typical St. Maarten fashion," noted Regina LaBega, managing director of the Princess Juliana International Airport operating company, PJIAE. "We are usually not hyped up by anything; we just go for it, get it done, and move on, no matter how extraordinary the achievement may have been."
Regarding the need for the bond issue, LaBega said, "airports are always in need of capital because they're always growing." She pointed to international airports, such as Schiphol in Amsterdam, Charles de Gaulle in Paris, O'Hare in Chicago; in Atlanta, Miami and closer to home, San Juan, Puerto Rico as examples of where there is constant construction activity in response to the growth in passenger movement and the capacity of aircraft.
For Clarence Derby, Chairman of the Supervisory Board of Directors of PJIAE, the bond issue was a "huge accomplishment that will have a major impact on the economy of St. Maarten."
Indeed, the economic development of St. Maarten is closely linked to the development of its airport. Nobody is more conscious of this fact than Minister Romeo Pantophlet, who at the New York closing ceremony stated that this would further facilitate the hub function of the airport.
This hub function – particularly for St. Barths and Anguilla, both considered high-end destinations – resulting in lower-than-normal passenger volatility, was what Moody's saw as key to the rating Baa2 it granted the airport.
This rating was also made possible by the sovereign rating of Baa1, which St. Maarten received from Moody's. Although the previous administration set the ball rolling, the current government recognized the importance of this and worked diligently and tirelessly to achieve the sovereign rating. Naturally, this would not have been possible without St. Maarten obtaining its new constitutional status on October 10, 2010.
According to PJIAE managing director LaBega, the importance of the bond issue in contrast to a bank loan from a St. Maarten bank is that, "you need to go to a wider source of capital – the capital market that has deeper pockets than the banks so to speak, to seek funds for major projects like we plan to undertake at the airport."
"The capital markets have more money and cater mainly to institutional investors such as pension funds, insurance companies, and banks among others," she said.
The difference between a bond and a loan resides in the fact that a bond is a security that can be bought and sold and has a usually fluctuating value.
Jan Beaujon, managing director of the Windward Islands Bank Ltd., said bonds are issued in large denominations in the primary market which functions really as wholesale.
"You can only subscribe to them at the moment of issue," he explained. "Banks can buy packages of a 100,000 or 200,000 and subsequently put them on the secondary market where anyone can buy them as retail, depending on how the bond is structured."
LaBega expanded on this. She said the bonds in the case of the airport, were sold to qualified investors. This means that such investors are very sophisticated and have rules to ensure that individuals, for example, do not buy bonds from corporate entities whose credit rating they cannot properly analyze.
"That's why we went through a very elaborate and strenuous process with Moody's, the rating agency, as well as another round of scrutiny by the investors – the underwriters, in our case, Nomura – because people want to protect their money," LaBega said.
"Our bond issue was structured and marketed solely to institutional investors. This has to do with our credit quality," said LaBega. The higher a corporate entity's perceived credit quality, the easier it would be for it to issue bonds at low rates and issue higher amounts of them.
According to Beaujon, the underwriter or arranger of the bond prepares the documents and advertises these to entities "they think will be interested in it." "The rating gives us a degree of confidence that the risk you're taking is worth it," he added.
The SXM Airport bond has a maturity of 15 years, meaning it will be due in 2027. This is typical for this kind of bond and the credit rating of the airport, LaBega said, and is the maximum maturity period generally for projects in the Caribbean because the region is not considered a mature market.
She further highlighted the fact that "SXM is one of the few airports in the world that is financed on its own. The government gave us a concession and we are very grateful for that, but most airports, for example, Miami, Atlanta, Chicago, and several others are supported by US federal and state funds. We are one of the few who depend mainly on our own revenues to finance development projects."
This and other factors, made the SXM bond "go like hot bread."
"We had a diversity of investors," LaBega revealed. "If we had more bonds we would have been able to sell even more. This is because the Princess Juliana International Airport has been in the market before, so we have a track record of paying our bills on time and meeting our obligations promptly. This shows discipline, which investors look for. My predecessor, Mr. Eugene Holiday, laid a very sound foundation."
The bonds are at a fixed interest rate of 5.5%, down from 8.25% of the previous loan. Regardless of the market conditions, this interest rate will remain the same for the next 15 years when the bonds will mature. The lower interest rate means substantial savings for the airport.
"It's like if you had a mortgage loan at 8.25% and you were able to refinance it and bring it down to a fixed rate of 5.5%. You can imagine how much you would be saving in this way," LaBega explained.
There was competition among the investors. The Windward Islands Bank Ltd. was one of the investors who wished they could have bought more SXM bonds.
Managing Director Jan Beaujon said his bank exchanged the old notes it had from the previous loan of the airport for the new bonds. It couldn't get more. "We were a bit late," he admitted. "There's only a certain amount (of bonds) issued and once they're sold, that's it."
LaBega said, "People were calling us after the deal was done asking if they could still get to buy our bonds. But there were no more left. It's like going to a restaurant and there is no more food to serve. This was because the 5.5% fixed interest rate is very good. It's a good deal. Good money always finds good deals, but bad deals don't find money."
The SXM bond issue opens up the door for other corporate entities on the island to try and do the same.
According to Beaujon, some government-owned companies on St. Maarten have obtained substantial loans in the past backed by the Central Bank, "which issued a guarantee to buy those bonds back in case of default." The Central Bank, he said, does this for an issue of "national interest."
"We do have a lot of liquidity now because the debts of the former Netherlands Antilles have been paid off since 10-10-10," he added. This means that the Pension Fund, insurance companies, banks and other financial institutions can invest their excess liquidity in bonds, especially St. Maarten bonds.
With the St. Maarten government unable to issue bonds of its own due to the conditions attached to its attainment of its new constitutional status within the Kingdom of the Netherlands, despite receiving Moody's sovereign credit rating of Baa1, the airport may have charted a new path to financing major projects in St. Maarten.