How to replace your NROCC income

On November 10^th, 2024, investors will receive the balance of their principal investments in the NROCC 9.375% 2024 bond.

Today we will:

1. Refresh our memory on the details of the NROCC bond
2. Identify potential alternatives
3. List the questions investors should ask their advisors when evaluating alternatives

A Refresher on what you own

The National Road Operating and Construction Company issued a global bond in 2011. It paid an annual interest rate of 9.375% (twice per year in May and November) and investors received 50% of their principal in 2023 and will receive the remaining 50% in 2024. The bond was unconditionally guaranteed by the Government of Jamaica. NROCC has a credit rating of B1 by Moody’s and BB- by S&P. According to Moody’s, “obligations rated B are considered speculative and subject to high credit risk”. According to S&P, obligations rated BB are “Less vulnerable in the near-term but faces major ongoing uncertainties to adverse business, financial and economic conditions”. This bond is considered “high yield” in the global markets. Therefore, investors seeking to replace this income should be comfortable looking at other similarly rated instruments.

Interest rates and bond yields are lower now

Jamaica is in a stronger fiscal position in 2024 than it was in 2011. As a result, the credit risk associated with Jamaica is lower and so are the yields on Jamaica related debt. When the NROCC bond was issued in 2011, Government of Jamaica bond yields ranged from 6.5% to 9.2% (indicatively). In 2024, Government of Jamaica bond yields range from 4.9% to 6% (indicatively). Lower yields over the period are not unique to Jamaica. The Bloomberg Global High Yield Index was yielding between 8% and 9% in November 2011. This compares to 7.5% on October 22, 2024. There are many hypotheses about why this is the case. Suffice it to say that a combination of structural and economic forces have brought us here.

What else can give you the same income?

It will be very difficult to get the same income for the same level of risk (i.e. for the same credit rating) because of the difference in the environment. Here are some alternatives to consider:

1. Different bond structures: Consider the deeply subordinated debt of European Banks. Coupons range from 8.5% to 10% on Investment Grade rated issuers. These notes have different types of risks and conditions that your advisor should explain. However, they are of a higher credit quality than NROCC and can provide similar income levels. There are a very wide variety of these notes with varying coupons, call dates and issuers. A few issues within the UK and France offer attractive value. You will reduce your credit risk with these securities.
2. State owned Emerging Market Companies: Consider State owned companies in Latin America with similar or slightly lower credit ratings. There are two national oil companies that are offering coupons ranging between 8.875% and 10%. One issuer is rated BBB by S&P and B3 by Moody’s and another issuer is rated Ba1 by Moody’s and BB+ by S&P. Like NROCC, these are considered speculative investments.

When speaking with your advisor make sure you ask the following questions about any alternatives:

1. What is the structure and terms and conditions of the investment being offered? Please explain it to me like I am a 5 year-old.
2. How easy is it to sell this investment?
3. How volatile is the price and what are the implications for me?
4. What is the credit rating of the instrument? What is the credit rating of the issuer? Explain where this ranks on the rating scale.

Marian Ross-Ammar is Vice President, Trading & Investment at Sterling Asset Management. Sterling provides financial advice and instruments in U.S. dollars and other hard currencies to the corporate, individual and institutional investor. Visit our website at www.sterling.com.jm

Feedback: If you wish to have Sterling address your investment questions in upcoming articles, e-mail us at: info@sterlingasset.net.jm