New public offerings and bonds boost Trinidad and Tobago's capital markets

The decade closed with an uptick in activity in Trinidad and Tobago’s capital markets, largely due to increases in initial public offerings (IPOs), a series of mergers and acquisitions (M&As), and a number of bonds issued in the latter half of 2018 and into 2019. Even so, activity in the financial markets remains muted, a pattern seen across many bourses in the Caribbean. The local market tends to be highly concentrated among a few large firms and lacks substantial participation from smaller companies.

Looking to the future, the evolution of the stock market will depend on a number of internal and external factors. The success of the neighbouring Jamaica Stock Exchange (JSE) has trickled down to T&T, attracting investors into the country as well as the wider region. T&T can look to the JSE – rated the best-performing stock market in the world by Bloomberg in 2019 – as an example to emulate (see analysis). At home, a drive to boost the participation of citizens and small and medium-sized enterprises (SMEs) in equity markets in particular may bring forth renewed dynamism and interest in the Caribbean’s largest capital market, especially when considered against the backdrop of an overall economic recovery in the country.

Structure & Oversight

Large conglomerates and financial institutions such as National Enterprises, the West Indian Tobacco Company, Republic Bank and ANSA McAL dominate the capital markets. The T&T Stock Exchange (TTSE) is a self-regulatory organisation, meaning that as a private entity, it can create and enforce its own regulatory standards with the wider goal of protecting investors.

Even so, the TTSE, listed companies and members still fall under the purview of the Securities Act. Introduced in 2012, the Securities Act is designed to provide a more efficient trading system and increase investor protection from systematic risk. It replaced the Securities Industries Act of 1995, which established the regulatory framework for trading fixed-income instruments and stocks, as well as created the T&T Securities and Exchange Commission (TTSEC). The TTSEC has three main functions: the registration of all market actors, market surveillance and tracking, and the full enforcement of the rules that govern operations. One of the most important changes brought about in the 2012 legislation was the introduction of new guidelines for the repo market for government bonds.

Bourse

The TTSE was founded in 1981 and serves as a platform to trade equities, bonds, mutual funds and US dollar-denominated securities. As of January 2020 there were 44 listed firms on the first tier of the TTSE, including banks, non-bank financial firms, conglomerates, manufacturers, mutual funds, SMEs and T&T NGL – a subsidiary of state-owned National Gas Company of T&T. The majority of the listed companies are from T&T, but firms from neighbouring countries such as Barbados and Jamaica are also cross-listed on the stock market. The Eastern Caribbean Securities Exchange, which serves eight member territories including Anguilla, St Lucia, Antigua and Barbuda also cross-lists.

In the years since the passage of the Securities Act there have been additional regulatory changes, such as the adoption of a new trading and surveillance platform in 2016 that brought additional efficiency and transparency to market activities. The Avvento platform came on-line in February 2017 and diversified the range of securities that could be traded. It also allowed brokers to trade remotely, which, by eliminating the need for a floor, could boost the volume and scope of trading.

Since the introduction of the new platform, the positive trading numbers have translated to a substantial increase in profits. In 2018 the TTSE recorded a profit after tax of TT$14.9m ($2.2m), representing a 275% increase on the TT$4m ($591,000) earned in 2017, according to the TTSE’s 2018 annual report. The exchange attributed the sharp jump to the restructuring of Colonial Life Insurance Company’s assets, as well as the listing of the National Investment Fund (NIF) bonds (see analysis). In addition, the TTSE’s revenue – largely derived from listing fees, membership fees, repo fees, registrar services and transactions – grew by 72% to TT$36m ($5.3m) in 2018. Expenses for the year totalled TT$16.9m ($2.5m), a 1% increase from 2017. Because of the more pronounced rise in revenues, the TTSE’s efficiency ratio of expenses to revenue improved, from 81% in 2017 to 47% in 2018.

There are several factors that have impeded further stock market expansion. Because of the relatively small number of companies listed on the TTSE, many funds have allocated excess capital overseas. Additionally, local buyers tend to hold on to TTSElisted assets for years, stifling trading activity and affecting the overall level of liquidity.

Central Depository

The T&T Central Depository (TTCD) began operations in January 2003 and is a subsidiary of the TTSE. Its main aim is to provide an accurate accounting and settlement of all transactions passing through the exchange. It therefore acts as a safeguard that tracks all transactions through the use of its electronic processing book entry system. As well as providing an efficient and secure way to buy and sell shares, it eliminates the need for the transferring of shares via a physical certificate, thereby making the TTSE more agile and reliable. Importantly, having the TTCD act as a third-party custodian has led to greater oversight and improved integrity of deals.

According to the TTSE’s 2018 annual report, that year the depository’s income increased by 81% to TT$15m ($2.2m), and its net profit after tax increased three-fold to TT$6.6m ($975,000). Furthermore, in 2018 the TTCD managed 47 dividend payments totalling TT$4bn ($591m), up from TT$3.6bn ($531.7m) the year before.

TTSE Performance

Overall performance on the bourse improved significantly in 2018 compared to 2017, when it was relatively flat. According to the Ministry of Finance’s “Review of the Economy 2019”, total stock market capitalisation grew by 14.8% in the 12 months leading to September 2019, reaching TT$136.1bn ($20.1bn). The expansion was attributed to a 42.3% jump in the Cross Listed Index and a 3.3% increase in the All T&T Index, and the TTSE’s composite price index (CPI) increased by 14.9% over the same period. This was a sharp contrast to the same period ending in September 2017, when the CPI and All T&T Index dropped by 1.8% and 5.1%, respectively, even as the Cross Listed Index grew by 6.7%.

The T&T Cross Listed Index continued its expansion into 2019, growing by 19% over the year, while the T&T Composite Index grew by 12.7%. Leading listed firms included the Jamaica Money Market Brokers Group, GraceKennedy Group and National Commercial Bank Financial Group, with their prices advancing by 46.9%, 36.2% and 27.3%, respectively. It is important to note these three stocks are Jamaica-based. The prices of T&T firms Guardian Media, National Enterprises, and Trinidad Cement fell by 50%, 28% and 26.7%, respectively, in 2019. The CPI that year measured in at 1468 compared to its 1983 base level of 100. Market turnover for the year was TT$1.1bn ($162.5m), with 12,054 transactions completed and $76.9m ($11.4m) worth of shares traded.

Trading Activity

Around 78.7m shares valued at TT$1.2bn ($177.3m) were traded on the stock exchange in the 12 months leading to September 2019, according to the “Review of the Economy 2019”. This was up from the 75m shares worth TT$1.1bn ($162.5m) traded between September 2016 and September 2017. T&T dollar-denominated funds were the main contributors to growth, increasing in value by 6.3% between August 2018 and June 2019 to reach TT$37.3bn ($5.5bn). Funds in foreign currencies posted a marginal growth of 0.2% over the same period, reaching $8.8bn.

New Listings

In the summer of 2018 the TTSE saw its largest-ever IPO. The TT$4bn ($591m) corporate bond from the National investment Fund oversubscribed by 82% and attracted 7346 bids. More recently, in December 2018 Barbados-based MPC Caribbean Clean Energy became the first renewable energy company to be listed on both the JSE and TTSE, as well as the first company in over two decades to list simultaneously on the JSE main market, the JSE US Dollar Equities Market and the TTSE. The IPO, which raised capital for clean energy projects across the Caribbean, was open for 11 days that month and raised $11m from 241 investors in both exchanges.

Mutual Funds

Mutual funds, or professionally managed investments conducted by fund managers, are the primary vehicles for T&T citizens to invest in fixed-income assets and equity instruments, with the amount of capital invested in mutual funds having grown steadily over the last two decades. Mutual funds expanded by 5.1% between September 2018 and June 2019, rising from TT$44bn ($6.5bn) to TT$46.2bn ($6.8bn), according to the Ministry of Finance. The performance was supported by an 18% increase in the value of money market funds to TT$10.6bn ($1.6bn) and a 5.4% increase in equity funds to TT$6.9bn ($1bn). Funds classified as “other”, which include special-purpose investments and high-yield funds, also contributed, expanding by 5.7% over the same period.

Similarly to trading activity, local currency-denominated funds accounted for most of the expansion in funds under management. Between October 2018 and June 2019 T&T dollar funds grew by 6.3%, compared to foreign currency funds’ expansion of 0.2%. There was TT$1.5bn ($221.6m) in net mutual sales over the same period, including both sales and redemptions, up from TT$978.3m ($144.5m).

Despite the strong performance, mutual fund regulation is an area that needs to be improved. While the instruments are seen as low-risk, with solid returns by individual and corporate investors, mutual funds operate in an environment that lacks clear rules. The TTSE publishes guidelines for the funds, but the suggestions are not enforceable by law.

M&A Activity

There was a flurry of consolidation in the financial sector in 2019. In March T&T bank and financial services firm Republic Financial Holdings acquired 75% of Cayman National Corporation – another financial services firm – for $198.4m. In May Jamaica’s banking and wealth management firm NCB Financial Group acquired a majority of shares in T&T’s Guardian Holdings, a financial services firm. Another prominent development was JMMB Group’s acquisition of a 22.5% stake of Barbados-headquartered Sagicor Financial, purchased from Canadian firm Alignvest Acquisition for a reported $250m in Class-B shares. Moreover, in December ANSA Merchant Bank announced it would buy Bank of Baroda’s operations in T&T. This move will facilitate ANSA’s diversification efforts.

Debt Market

The TTSE has 30 sovereign bonds in T&T dollars and four issued in US dollars, as well as 24 corporate bonds in local currency and an additional 10 in US dollars. Of the corporate bonds, three are issued by the NIF, a government entity that falls under the Ministry of Finance. The bonds were issued between July and August 2018 with an aim to raise TT$4bn ($591m), and were supported by companies with a total market value of TT$7bn ($1bn). They were offered at fixed-rate options of 4.5%, 5.7% and 6.6% over a period of 5, 12 or 20 years, respectively. For the bondholder, tax-free interest payments will be issued every month and the main amount will be rewarded upon the bond’s maturity. Bi-annual bond payouts totalled TT$112m ($16.5m) in both February and August of 2019, according to Colm Imbert, the minister of finance, in the 2020 budget statement released in October 2019.

Despite the success of the NIF issuances, government data shows a slight decline on primary bond market activity in the nine months between October 2018 and June 2019. Over this period the TTSE issued 13 bonds worth TT$7.3m ($1.1m). The government drove much of the activity, issuing 10 bonds totalling TT$6.3bn ($931,000) to be used to support the budget and assist in the costs related to the closure of the state-owned oil and gas company Petrotrin’s refinery in November 2018 due to low profitability (see Energy chapter). This was down year-on-year from the 16 primary issues totalling TT$9bn ($1.3bn), of which seven bonds worth TT$5.8bn ($856.9m) were issued by the government.

Trading on the secondary bond market also decreased over this period. There were 49 trades of government-issued bonds, adding up to TT$167.7m ($24.8m). This was down from the 71 trades that came to TT$758.3m ($112m) in the comparative 2018 period, according to the Ministry of Finance.

SME Financing

Around 85% of T&T’s companies are SMEs, and together they comprise 30% of GDP and a large proportion of the workforce. As such, the government has been working to boost access to equity financing for these smaller companies, as they find it more challenging to secure traditional financing. SME involvement in equity can have benefits beyond the sector, as they can fuel wider economic growth and create jobs.

A number of initiatives have been implemented to increase the number of SMEs on the stock exchange, and counter the trend of larger conglomerates and financial institutions dominating listings. The FY 2011-12 budget laid out plans to create a junior stock exchange dedicated solely to SMEs, to provide such firms with an avenue for raising capital in the local markets. Companies receive incentives to list their shares, such as a special tax concession that allows companies to pay a reduced corporation tax for five years following the listing. Other benefits include no admission fees and reduced listing fees. The rules stipulate that companies on the exchange have the flexibility to list in both T&T and US dollars.

The first SME, CinemaOne, listed on the market in November 2018. The company raised TT$14m ($2.1m), significantly short of its TT30m ($4.4m) target, and company representatives told local press that month that it would look to loans from commercial banks and venture capital make up the rest. In October 2019 real estate firm Endeavour Holdings went public, becoming the second firm to list on the SME market. Endeavour Holdings’ IPO attracted 302 purchase applications for 884,419 ordinary shares, raising TT$11.1m ($1.6m) in equity. The firm owns nine commercial assets and announced it would use the proceeds from the listing to fund its working capital requirements for six months.

Financial Literacy

Policymakers are also looking to engage the broader population in the capital markets. In 2015 the TTSEC launched InvestucateTT, an investor education platform to facilitate financial literacy. It features advice tailored to different life stages, such as teenage years, early working years, middle age and retirement age. In September 2019 InvestucateTT launched Investor Quest TT, a game designed to help individuals learn about investing and get involved in the securities market. The game is played through a mobile app and is a simulation of financial markets that provides participants exposure to personal finance, economics and investment.

However, it will be necessary for the authorities to build on the momentum and interest gained through the InvestucateTT portal and Investor Quest TT game in order to successfully turn individuals into lifetime investors. Part of this will be contingent on Trinbagonians adopting an attitude that accepts higher levels of risk. T&T tends to be more risk-averse in the financial markets, and, as such, local investors tend not to have extensive interest in a wide range of assets that are considered riskier,” Ronald Carter, CEO of JMMB Bank, told OBG. “By comparison, Jamaica’s stock market is significantly larger and deeper, which is in part a reflection of the country’s higher appetite for risk and higher returns. Aspects of T&T’s risk aversion are changing, but it is largely focused on market actors that influence behaviour, rather than a more systematic overhaul.”

Outlook

New listings and an uptick in trading activity on the bourse have helped T&T’s capital markets bounce back from a rather stagnant 2016 and 2017. Both 2018 and 2019 saw a varied selection of IPOs across a number of sectors, as well as dynamic activity in both the equity and debt markets. While mutual funds continue to be the investment vehicle of choice for many in T&T, moving forward it will be necessary for the TTSEC to implement more stringent and enforceable regulations that can protect investors in the segment. Bond activity remained subdued throughout 2019, despite the well-publicised NIF issuance. To counter this, it will be important to attract more entities from the private sector to the market to balance government offerings.

Consolidation in the financial sector demonstrate the country’s attractiveness to investors and connectivity to other important financial centres in the region, such as the JSE. With overall economic growth projected to pick up in the coming years, it is expected that the TTSE will benefit from higher share prices and renewed involvement on the exchange. Importantly, companies with healthy cash flow will also be in a position to return a higher percentage of their earnings to shareholders, increasing dividend pay-out ratios.

Efforts to boost SME access to equity and increase financial literacy among the general public are important first steps towards bringing higher levels of activity to the market. The SME market, while still in its infancy, will be important in enhancing awareness about the stock exchange, as well as provide new financing alternatives for smaller companies.