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Rich offered new, higher-risk instruments that shun masses

HIGH-NET investors are getting dozens of offers per quarter to pump their funds into relatively high-yielding debt and equity securities in offers not sent to the masses called exempt distributions or XDs, with the $11 billion offer from VM Financial Group being the latest.

These financial securities firms are not elitist. But they are careful to offer these higher-risk instruments to persons with deeper pockets to withstand shocks.

The VM Financial Group plans to list the shares on the “private market of the Jamaica Stock Exchange (JSE)”, according to the document outlining the terms and conditions of the VM offer. The VM offer opened on March 31 and expires on April 28.

“Securities listed on the private market may be bought and sold only by accredited investors and large purchase investors – the latter being persons whose trade must be J$10 million or more in value,” stated the VM term and conditions sheet.

Accredited investors generally can include financial institutions, pension funds, and rich individuals.

VM Financial Group is the financial holding company for the Victoria Mutual Group of companies, and the offer aims to further capitalise the entity. The VM preference shares will offer investors interest rates between 10 to 12.5 per cent per annum depending on the tranche investors take up.

That said, other financial entities held recent XDs as well, in both local and US currency. As one example, the Proven Group opened its US$20 million bond offer to accredited investors in March this year.

The macro challenges, along with rising interest rates, resulted in making XDs more attractive to accredited investors.

“The demand for XD instruments remained vibrant, despite the macroeconomic challenges precipitated by the COVID-19 pandemic and exacerbated by the Russia-Ukraine war,” indicated the regulator Financial Services Commission (FSC) in its latest industry data released this month. “As general interest rates rise, XD debt instruments typically become more attractive to investors as they seek to earn higher investment returns.”

In the December 2022 quarter, the FSC registered $40.7 billion worth of XDs, mainly debt offerings from 31 entities. That compared with $61.7 billion in the September 2022 quarter and $53.4 billion in the December 2021 quarter.

On the US dollar side, there was an additional US$96 million registered in December 2022 compared to US$26 million in September 2022 and US$367 million in December 2021.

Generally, a fraction of the registered XDs are issued or fully taken up, but it is still offered to the accredited investor market, based on the FSC tables. For instance, in December 2022, $17.6 billion and US$28 million were issued, respectively.

Under the said XD guidelines, issuers of securities are permitted to register both debt and equity securities with the FSC. Overall, 16 securities dealers act as arrangers for these XDs, with 404 issues outstanding totalling $404.2 billion and US$1.45 billion up to December 2022.

In January, securities firm Mayberry closed its $7 billion bond offer to the public, described by some as a rare move by establishment firms.

The entity argued that the recent volatility in the stock market had a double impact on small investors, who were largely unable to access the bond market, readily like large investors.

“For retail investors that are not able to invest as accredited investors there has been very little opportunity to invest directly in short- to medium-term debt instruments of local blue-chip companies. That has led some retail investors to have portfolios that are heavily overweight equities,” stated Mayberry chair, Chris Berry, in the prospectus of its bond offer. “The last six months have seen extremely volatile securities markets. In such times, having exposure to fixed rate secured debt that matches the investor’s need for funds can provide a valuable cushion to ride out the inevitable dips in equities.”

Accordingly, Mayberry believes that now is the opportune time to issue the secured bonds and for retail investors to consider rebalancing their portfolios to get exposure to publicly tradeable fixed rate debt instruments.

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