A trio of Canadian banks is facing the fallout from a debt restructuring in Barbados that will slash the value of hundreds of millions of dollars worth of government paper they collectively own.
Canadian Imperial Bank of Commerce, Royal Bank of Canada and Bank of Nova Scotia are the largest lenders in the Caribbean, and each has direct exposure to Barbados. The country is home to one of the region’s largest economies, but the government’s finances have deteriorated over time. In May, a new prime minister, Mia Mottley, was elected and she has promised to make fiscal responsibility her top priority.
To help turn the economy around, the International Monetary Fund is working with Barbados to formulate a financial rescue plan. As part of this effort, the government proposed a debt restructuring in September that would amend the terms of its existing domestic debt. On Sunday, Ms. Mottley announced the restructuring plan will proceed.
Through the restructuring, Canadian banks will face losses on their debt holdings because Barbados has forced them to hold a greater percentage of their reserves in government debt, to help fund its deficits. These securities must now be held for much longer, and their coupons will also be cut, so the lenders will receive much lower returns on their money.
The total impact on Canadian lenders is still being calculated, but the three affected banks hold a substantial amount of Barbados debt. As of January, 20 per cent of their Barbadian reserves had to be held in government debt.
CIBC is the only bank of the three that has disclosed its exposure. In a regulatory filing earlier this year, the bank’s regional subsidiary, FirstCaribbean, which is based in Barbados, revealed that it had US$506-million worth of exposure to the government through securities and loans. Of that, US$445-million will be exchanged under the government’s plan, and the bank holds another US$30-million in debt instruments for which a restructuring plan has yet to be announced.
CIBC spokesperson Tom Wallis said the bank accepted the debt exchange offer, “remains fully committed to further negotiations” with the government of Barbados, and “will continue to exceed all of its regulatory and policy liquidity requirements.”
RBC and Scotiabank have not disclosed the extent of their exposure, but their regional headquarters are based in other countries: RBC in Trinidad and Scotiabank in Jamaica.
A spokesperson for RBC, Gillian McArdle, said the bank’s exposure to the distressed debt “is limited” and that RBC supported the government’s proposal. “Any potential impact from the government’s proposed debt exchange is not material to RBC,” Ms. McArdle wrote in an e-mail. “We are closely following developments in the country.”
A Scotiabank spokesperson declined to comment.
To help fix its finances, Barbados is relying on a common restructuring tactic, often referred to as “amend and extend.” As part of the Barbados Economic Recovery and Transformation (BERT) program, the government will amend the terms of its domestically held debt, and commercial banks will see their holdings broken into different tranches with maturities ranging from five to 15 years.
The coupons on this debt will also be significantly reduced. Before the restructuring, government treasury bills often paid interest rates around 3.5 per cent, and other government debt had interest rates as high as 7 per cent. Under the new terms, commercial banks will receive 1-per-cent coupons for the first three years; 2.5 per cent in year four; and 3.75 per cent annually until maturity.
On Sunday, the government said it received the support of 90 per cent of its debtholders eligible to vote on the restructuring proposal. “I’m happy to report that having received the support and the positive vote of all of our banks, our insurance companies ... we are now in a position to address their peculiar needs within the next few weeks,” Ms. Mottley said in a public address.
With this backing, the IMF is now likely to release the full US$290-million it has pledged in financial support, providing Barbados with crucial foreign reserves during the turnaround.
However, CIBC, RBC and Scotiabank are still wrestling with abnormally high risk in the region. At the end of fiscal 2017, Scotiabank reported $1.2-billion worth of gross impaired loans across the Caribbean and Central America – beating its total of $1.1-billion for all of Canada. In the same period, RBC reported a gross impaired loan ratio of 6.33 per cent in the Caribbean, many multiples higher than its 0.24-per-cent ratio in Canada.
The region’s woes have hit CIBC particularly hard. In 2014, 58 per cent of the bank’s total gross impaired loans came from the Caribbean, leading to a $420-million writedown on the division that year. In the most recent quarter, CIBC earmarked $44-million to cover expected losses on impaired FirstCaribbean loans, in large part because of Barbados’s financial woes.
Tim Kiladze
James Bradshaw