The government issued a total of $ 1.35 billion in new bonds, the aggregate outstanding debt has increased by about $ 520 million, the government debt now stands at $ 2.97 billion and the annual cost of servicing the debt is currently $ 127.2 million, or 13.6 cents of every dollar of revenue the government accepts, said Finance Minister Curtis Dickinson
Speaking in the House of Assembly today [Dec 4], said the minister: “It is important to note that although the government issued a total of $ 1.35 billion in new bonds, the overall debt stock has increased by approximately $ 520 million, because the majority of the proceeds were used to refinance the existing debt and the rest deposited in the sinking fund which will be used to finance the deficits forecast for the current fiscal year 2020/21 and the next two years.
“As we continue to navigate the COVID-19 pandemic, this borrowing strategy was essential. This has allowed the government to lock in historically low rates to help finance an economic recovery, reduce interest expense on existing debt, and take advantage of the current strong global demand for high quality assets like Bermuda’s.
“Like most small states and territories, Bermuda’s economy is highly vulnerable to external events, which underscores the need for fiscal and fiscal prudence. This vulnerability is compounded by our persistent budget deficits and the high level of public debt, which now stands at $ 2.97 billion. This vulnerability has now materialized in a much faster and more potent form than one might have expected with the onset of COVID-19.
“With this new loan, the annual cost of servicing the debt is currently $ 127.2 million, or 13.6 cents of every dollar of income the government takes. This level of debt service has the potential to shift spending into extremely important areas such as education and social services. and national security.
“We need to focus on valuing the dollars we spend, as our ability to take on additional debt will become increasingly limited, underscoring the urgent need to balance the budget and reduce our debt load.”
The Minister’s full statement follows below:
Mr. Speaker, Honorable Members are informed that on Thursday, August 20, the Government of Bermuda issued $ 1.35 billion in senior notes, split equally into two tranches: a 10-year maturity with a record coupon of 2.375 %, and the very first 30- year at 3.375%. In accordance with section 2 [3] of the Government Loans Act 1978, I am pleased to rise this morning to inform this Honorable House of the execution of this borrowing transaction in accordance with the requirements of the law.
Mr President, I am now happy to report on this successful operation on the financial markets.
Mr. Speaker, on Monday August 11, 2020, the Government of Bermuda announced a three-day tour with a series of fixed income investors starting Wednesday August 12, 2020. These meetings were part of the government’s process to assess conditions market and potential funding opportunities to meet its borrowing needs for this fiscal year, due to the impact of COVID-19, and future years. At the same time, it was also announced that Bermuda would offer to cash back four series of our outstanding USD bonds.
While the roadshow was 100% virtual given the limited travel context, the government was able to present itself effectively in video and audio calls with investors around the world during the 3-day marketing period as the 5-day takeover bid was open.
Mr. President, after hearing about the main social security measures taken by the government to mitigate the impacts of the COVID-19 pandemic on the country, and the government’s plans to rebuild our economy and reduce our deficit in the context of the COVID-19, Feedback from prospective investors has been very constructive and supportive of the proposed transaction. As a result, the ensuing transaction drew strong demand from some of the world’s leading investors.
Given the favorable context for new debt issues in US dollars and the favorable base rates in effect, the government took the opportunity to finance not only the deficit and the residual budget deficits of fiscal year 2020/21 for years to come, but also to refinance various loan facilities with local financial services. institution due to mature later this year and early 2021 and, alongside the new issue, engage in a targeted liability management transaction to strategically repurchase some of our maturing 4.138% coupon bonds in 2023, our 4.854% bonds due 2024, our 3.717% coupon bonds due 2027 and our 4.75% coupon bonds due 2024.
Mr.Speaker, it is important to note that although the government issued a total of $ 1.35 billion in new bonds, the overall debt stock has increased by approximately $ 520 million as the majority of the proceeds was used to refinance existing debt and the remainder deposited in the Sinking. Fund to be used to finance the deficits forecast for the current fiscal year 2020/21 and the next two years. This exercise will produce ongoing annual interest savings on existing debt of approximately $ 10 million, although the overall interest expense will increase by $ 3.1 million.
As previously reported, the Government of Bermuda hosted an efficient and timely virtual tour that included calls with approximately 50 global accounts during the three-day tour of marketing efforts.
Mr. Chairman, following the roadshow on Monday, August 17, 2020, the transaction was announced and the transaction immediately attracted strong demand and attention from some of the world’s largest institutional investors.
Mr.President, initial orders were close to $ 10 billion, roughly eight times the original target of $ 1.25 billion, which not only translated into a reduction in final interest rates on both tranches. of banknotes, but also by the smallest 10-year spread in the United States. Treasures never before realized by Bermuda. It also allowed us to take the deal to $ 1.35 billion.
Other details and highlights of the transaction include:
- Bermuda’s first 30-year notes were placed at 3.375%, notably inside the previous record low coupon on the 3.717% notes due 2027 [i.e., 34bps less interest for 20 years additional maturity].
- A 10-year US Treasury spread of + 170bp broke the previous record spread of T + 175bp reached on 2029 banknotes issued in November 2018. Adding to the list of achievements was pricing for the new 10-year banknotes 15bp in the mainstream 2029 note trading levels [8.2yrs maturity], demonstrating the willingness of investors to buy new Bermuda bonds at tighter spreads despite a longer maturity.
- Bermuda also established its very first long-term issue, pricing the new 30-year notes at a US Treasury spread of +195 bps. While a clear endorsement of Bermuda’s outlook for the next 30 years, the spread is notable because it is flat within every 10-year emission spread Bermuda has executed except for the 2029 notes. .
- Concurrent partial take-over bids significantly reduced short-term maturities, where $ 500 million principal amount on 2023, 2024, 2027 and 2019 maturities was refinanced at lower rates
- The new issuance and tender offer reduced the annual pro forma interest expense on the repurchased notes by approximately $ 6.4 million. Combined with the refinancing of the short-term credit facilities, this represents approximately $ 10 million in ongoing annual interest savings.
- A reduction in the coupon of the average pro forma government portfolio of -0.59% is also expected, as well as an 8.4 year extension of the average maturity of the debt portfolio. The two-tranche structure also allows Bermuda to maintain a smooth and manageable debt maturity profile.
- The combination of ever-tightening issue spreads and a large order book speaks volumes about Bermuda’s continued proactive debt management as a whole and the current management of the pandemic, a view clearly validated by the most relevant global market players.
Mr. Speaker, as we continue to navigate the COVID-19 pandemic, this borrowing strategy was essential. This has allowed the government to lock in historically low rates to help finance an economic recovery, reduce interest expense on existing debt, and take advantage of the current strong global demand for high quality assets like Bermuda’s.
However, Mr. Speaker, as 2021 approaches, international financial markets are expected to tighten. As conditions tighten, it will be essential to maintain the confidence of investors and rating agencies. Therefore, it is absolutely essential that we continue to manage the financial affairs of the country prudently and we must be astute in using the additional funds borrowed from this debt issue.
Mr. Speaker, like most small states and territories, Bermuda’s economy is highly vulnerable to external events, which underscores the need for fiscal and fiscal prudence. This vulnerability is compounded by our persistent budget deficits and the high level of public debt, which now stands at $ 2.97 billion. This vulnerability has now materialized in a much faster and more potent form than one might have expected with the onset of COVID-19.
With this new loan, the annual debt service cost is currently $ 127.2 million, or 13.6 cents of every dollar of income the government takes. This level of debt service has the potential to shift spending to critically important areas such as education, social services, and national security.
We need to focus on getting more value from the dollars we spend, as our ability to take on additional debt will become increasingly limited, underscoring the urgent need to balance the budget and reduce our debt load.
Mr. Chairman, this historic transaction was successful in all respects, and I would like to thank the entire Bermuda team for their efforts as strategic partners to help give the Government of Bermuda a very positive outcome in this recent public offer number. in world markets.
Thank you, Mr. Chairman.
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