Dear Editor,
I take the view that the bridge project was a necessary one. It filled a great need. Berbicians travelling to the airport or Georgetown used to have to sleep at the New Amsterdam and Rosignol stellings waiting on the ferry just to get to their destination on time. Let us give credit to those who had the vision to build the bridge. I think the country can afford to build the bridge. Mr Brassington badly screwed up the financial architecture in terms of ratio of debts (bondholders) to common and preferred stockholders. Too much debt, too little equity (common and preferred stock); no sunken capital; too many short-term bonds.
If you are buying a house for $500,000 and put down $200,000 you will pay interest only on $300,000, as opposed to putting down $50,000 and paying interest on $450,000. In the latter case you’d be paying higher monthly charges to service the debt and principal. The down payment is the sunken capital; the larger the sunken capital, the smaller the monthly debt service payouts.
In the bridge project, there is too little sunken capital and too few cars to generate enough revenues to service the debt, plus having some revenues remaining to pay dividends to common and preferred stockholders.
Another problem when bonds become due, is that you have to find money to pay off the principal (face value). Mr Brassington issued too many 5-year bonds. There is no way ‒ knowing the revenue streams ‒ BBCI could find the money to pay off bonds that come due in 5 years. Bonds should be issued in 20, 25, 30 year terms. We still don’t know the interest rate for these bonds. The interest rate on the world market is very low at this time 3%-6%. (I am told the bonds were issued with a 10% interest rate.)
Why did BBCI report losses of $1.5 billion? They were certain that they’d be able to raise tolls from US$11 to US$17. This is how they expected to raise revenue to pay off the bonds that come due. This was fantasy.
BBCI is really just like a utility company ‒ no different from Con Edison in New York. Con Edison has to submit applications to an independent rate-setting board every time it needs rate increases. It’s the same for BBCI. In Guyana the rate-setting board is really the cabinet. To expect the cabinet to raise tolls to US$17 you’d have to be a little wacko. Instead the cabinet ordered a reduction of tolls, and because cabinet knows of the financial problems of the bridge, it decided to subsidize the tolls at no cost to BBCI. The $1.5 billion loss is not due to fewer cars using the bridge, but because it could not get the US$17 toll, and BBCI had to pay off $500 + 600 million for bond principals that become due.
I propose the following solution:
(1) NIS invested $960 million (preferred shares) in the bridge. Let NIS write off $460 million as sunken capital. The remaining $500 million (preferred shares) will pay a 6% annual interest rate.
(2) Sell G$400 million (US$2 million) bonds (20, 25, 30 year bonds) to the Guyanese public at 6-8%. Use these funds to pay off all common stockholders. They’d be happy to grab the cash and run. They also know there is no chance for them to earn dividends in the foreseeable future. US$2 million is really peanuts in proportional terms to give them control of the board.
(3) Reconstitute the Board of Directors with sound professionals. Hire professional management.
(4) Sell bonds on the world market or to Guyanese. Use the funds to retire short-term bonds and bonds earning above 6% interest rate. (Guyanese living abroad are earning .01% on savings and less than 4% on 5-year CDs. These bonds will sell like hot cakes.)
Not knowing the value of bonds and interest rates outstanding, it is not possible to calculate the yearly payouts. But the yearly lower payout to the NIS will substantially contribute to the solvency of the BBCI. The $460 million of NIS shares that is now treated as sunken capital is not really lost; at some point in time, the BBCI will be able to repay these funds if the life of the bridge is not over. I don’t know the life-span of the bridge, but seawater is not kind to those steel pontoons.
This proposal solves two problems: (1) It gets rid of the Board of Directors which does not reflect the distribution of share capital; (2) By NIS converting almost half of its share capital to sunken capital reduces the annual payouts from limited revenues. It makes the BBCI solvent. Issuing new bonds at lower interest rates and lengthening the terms to liquidate existing bonds eases the financial pressure on BBCI.
The government should set a deadline of two weeks to resolve the bridge impasse; it should be decisive and not appear weak
Yours faithfully,
Mike Persaud
