Tuesday 18 September, 2018

The National Investment Fund: An investment opportunity for all

If you’ve been thinking about getting your affairs in order and putting aside some cash to build up your savings, the National Investment Fund Holding Company Limited (NIF) is the perfect opportunity for you to get started.

The NIF bond will be offered to institutions and individuals with the objective of raising TT$4 billion.

Fixed income bonds of the NIF officially went on sale on July 12.

LoopTT sat down with First Citizens Investment Services, General Manager Sana Ragbir who broke down the incentives and benefits to those seeking to purchase bonds.

What is the NIF?

The NIF is a company (National Investment Fund Holding Company Limited) and the company itself has 5 main assets, Republic Financial Holdings, Angostura, WITCO, One Caribbean Media and Trinidad Generation Unlimited (TGU).

Ragbir explained that while it’s called a fund, it’s not a mutual fund or a registered fund, and is an actual company.

The company has decided to issue bonds and it will back (secure) all of those bonds with those five assets.

What is a bond?

Ragbir said the best way to think of a bond is to think of it as a loan.

“When you buy a bond, you as an investor, you are actually giving a loan to a company or a government, whoever the issuer of the bond is. In return for giving that loan, you receive an interest rate and it will pay at certain times of the year.”

“Upon maturity date of the bond, you will then get back all of the money that you would have loaned to this company or government,” she added.

What’s the incentive?

The NIF plans to issue a bond in the amount of TT $4 billion in three Series as follows:

1. Series A - TT $1.2 billion with a tenor of 5 years at a fixed rate of 4.5%

2. Series B - TT $1.6 billion to TT $2.0 billion with a tenor of 12 years at a fixed rate of 5.7%

3. Series C – TT $800 million to TT $1.2 billion with a tenor of 20 years at a fixed rate of 6.6%

The incentive here, Ragbir says, is that the bonds will pay interest semi-annually.

“It’s an annual rate of return but it will pay you every six months – on February 9 and August 9 every year. And, upon maturity, if you buy the five year bond on August 9, 2023 on that maturity date you will then get back your original investment if you hold it to maturity, and it’s the same for the 12 years and 20 years.”

Further, the First Citizens banker said, a bond, especially in the case of NIF, is a good investment to add to a person’s portfolio.

Explaining the difference between a bond and an equity, she said the less risky choice would be a bond as it has a fixed rate of return and is subject to less price fluctuations.

“First Citizens Bank, TTNGL, you would have seen that it trades up and down. With a bond, on the other hand, you are guaranteed a fixed rate of return, and then, while it is not a price risk, it is not as volatile or fluctuates as much as an equity would in terms of price.

Yes, there is price risk in the bonds but not as much as the equity. So it’s a good mix to add to a person’s portfolio because it brings that balance of risk into your investment, it’s a good savings product, and more importantly, if you think of where the available investments options are on the market, getting bonds for individuals, in particular, it’s very difficult.” 

“It’s the attractive rate of return, but at the same time, not as much risk as an equity,” she said.

How is the NIF catered to the millennial?

With the attractive rates of return on the NIF, millennials can put aside their funds, lock it up and put that money towards retirement, or, alternatively, if they want to save or put it aside for their children’s education.

Saving towards an MBA or purchasing a house are just some of the reasons persons have been purchasing NIF bonds.

With the tranches offered by NIF there is ‘something for everyone’.

“We have actually seen some people come in and they are not just buying one series, they are spreading it out because they have different objectives. We have had some cases where they want the 20 years because that’s the inheritance for the children.”

“It depends on the different objectives and they put it to each series accordingly,” Ragbir said.

How affordable is the NIF?

The minimum investment is $1000 and it trades in multiples of $1000 thereafter.

In other words, if you place $1000, you could do $1000 or $2000. You would not be able to do $1500 because it will always be a multiple of $1000.

Ragbir said the good thing about these bonds is that the way it is being offered means that the investors do not pay any fees.

“So, it is a low minimum of $1000 and if you look at bonds internationally, and even in Trinidad, typically bonds do not trade in such small amounts. You may get them in $20,000 or $50,000. The NIF company has actually opted to bring that down to $1000 to allow everyone the option and the opportunity to invest.

There are no fees to buy in this offer. If, however, there are subsequent to this offer, and once the bonds are listed on the Exchange and they start to trade, somebody wants to buy or sell, there will be fees attached and that’s the fees associated with the Stock Exchange and your broker fee.”

How secure is investing in NIF?

The NIF will be issuing bonds to a total of $4 billion. All of the $8 billion in assets will be use to secure the $4 billion.

Ragbir likened investing in NIF to purchasing a vehicle.

“If you had to buy a car, usually when you go to the bank, the bank would hold your car as collateral and you would have to make a downpayment, or even with a house. But that downpayment is never as high for two times the amount for have to borrow. It may be that you paid down 10 percent and they lend you 90 percent depending on the margin.

If you think of these bonds, here you have a situation where you, the public is lending $4 billion to the NIF in return for collateral that is $8 billion, so that two times coverage is almost 100 percent collateralized. This is very much above the industry standard, so it gives that added protection to investors that you have more than sufficient collateral to cover the $4 billion, which is two times the amount and then, in the event that, for some reason, the bonds cannot be paid, you have to have that sufficient collateral that the collateral can be sold to pay the bonds.”

The First Citizens banker said with the dividend flows of the five assets, and in particular, the backing of Republic Financial Holdings, (55 percent of the assets), TGU, ( 26 percent of the assets), investors are assured of stable dividend cash flows to service the bonds.

She made the point that while this is not a Government bond because there is no explicit Government guarantee on the bond, the NIF company is 100 percent owned by the Government.

Ultimately, Government has to ensure that the bonds are serviced.

“In terms of security, the Government, at the end of the day, as the sole shareholder and the people who are responsible for this company and these bonds, will also ensure that there is enough money to pay those bonds. So, it is like taking Government risk, but there is no specific Government guarantee.”

What are the risks?

One of the risks Ragbir said investors should be aware of relates to the inability of an individual to hold a bond to maturity.

“If for some reason you have to sell the bonds before maturity, one, you can do it on the Trinidad and Tobago Stock Exchange or through your broker where you would have placed your purchase and tell them you want to sell and they will put it up for you.”

The risk, she said, lies in the movement of interest rates.

“Once interest rates go up, the price of the bond will be lower. So then there is a risk that you sell at a price that is lower than what you invested. But, if interest rates go down, it’s the opposite as the price will be higher.”

Allocation

Rabgir addressed the issue of over-subscription, which was a concern with previous initial public offerings.

In the case of NIF, she said, individuals will be given priority over companies on these bonds.

“All of the companies will rank second to priority and they will be prorated,” she said.

“If you have a situation, think of the five year, where the Prospectus says the 5-year can be $1.2 billion. If you a situation where there is $1.5 billion, but individuals applied for a total of $500 million, then $500 million goes to the individual first, who gets 100 percent of their allocation, and everything else is allocated based on a formula to the companies, but individuals will have a priority in this particular instance,” she explained.

Saving and Investing

Ragbir believes the NIF is an excellent opportunity for millennials to start saving, especially as saving is not “part of our culture.”

“This is a good opportunity to really get the millennials involved, start putting aside money, start saving, because the other generations will tell you the importance of it when they realise they should have started younger.

The great part about the NIF, she said, is an opportunity for the society to start learning about bonds and that not everything has to be Government guaranteed.

“When we have products and investments like this, it helps develop the capital markets of Trinidad and Tobago and as a society we begin to step out of our comfort zone of the traditional, and we start to get into a little more of the investments and financial world and it really is not a bad step to take and it’s not a high risk investment,” she said.

Ultimately, Ragbir believes the asset-backed structure of the NIF serves as a means of educating people and getting the society more developed and more educated about investment, and pitching it to young people is the right start.

 

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