Finance Minister Cox comments on Bonds
In reflecting on the comments about of the Opposition Party given by the Shadow Spokesperson for finance, the Deputy Premier and Finance Minister Paula Cox, summed it up in one word: “Trite”.
Minister Cox said:
It baffles me that the Opposition’s comments took no account of the range of dynamics that shape the outcome of a bond sale. The key considerations include the following factors: previous knowledge of the issuer, the sovereign credit rating of the issuer, the country size of the issuer in terms of GDP, the size of the offering and therefore the presumed liquidity of the offer, and the state of the market.
Informed observers and commentators commended Bermuda’s outcome on its debut offering in global debt capital markets. On the date of the issue, the bond sale was priced at the tightest end of the market, namely, a spread of 250 basis points over the US 10-year Treasury Bill.
All the Opposition could say was that it was an expensive exercise for Bermuda. It caused me to ask the question – ‘expensive compared to what?’
If we look the Opposition’s record of long term borrowing when the United Bermuda Party was in government, we find that the coupon or interest rate was higher than what Government achieved on the recent bond. For example, in 1994, the United Bermuda Party Government attracted a rate of 7.59% on a senior debt issue. A Progressive Labour Party government refinanced that facility at a lower rate of 5.39% in 2004.
Another example, in 1997, the United Bermuda Party government attracted a rate of 6.72% on an issue with a ten year maturity. You will note that both issues were single bullet maturities and not staggered as the Opposition said should have been done with the recent issue. In any event, that ten year facility was refinanced at 5.73% in 2007.
The simple truth is that no administration in Bermuda has been able to obtain a long term interest rate on debt instruments below 5%.
Further, if the Opposition had conducted some research before it rushed to the media with ill-advised comment, it would have found that other sovereign issuers in 2010 with similar maturities have offered investors coupons or interest yields in a range of 5.0-7.5%.
So the question for the Opposition is: “expensive compared to what?”
It is also a regret that the Opposition continues to be dismal about Bermuda’s future. One hundred and forty-six global investors (including some Bermuda entities) collectively were prepared to invest $2.4 billion in Bermuda. These investors have a positive outlook for Bermuda. The Government of Bermuda has a positive outlook for our Country and anticipates that all of the loans on Bermuda’s books will be paid off in time.
It is important to remember that there is nothing inherently bad about debt. Debt is a tool that allows households, businesses as well as governments to transfer cash-flow from one period to another. The key is to be prudent and remain within the capacity to repay.
Bermuda’s level of debt is prudent and sustainable. Our debt to GDP ratio remains one of the lowest in the world. Our capacity to repay long term debt is both viable and visible.
Further, the debt is reflected in visible improvements to social infrastructure in our community including modernized school buildings and equipment, an airport that meets international safety and security standards, a modern cruise dock that accommodates the larger cruise vessels deployed in the cruise business, modern bus and ferry service, well equipped clinics and other public health facilities, safety improvements to Bermuda’s roads, etc, etc.
The borrowing has not been frittered away. Rather, it has been transformed into assets that will service the community for many years to come.
The subject of debt is a serious matter that should be discussed soberly and objectively. It is disappointing that the Opposition has chosen to politicize the subject for its own narrow political ends. Their statement has done nothing to enlighten the community.
SPIN…….
‘Their statement has done nothing to enlighten the community.’
And the PLP’s irresponsible ,out of control,unaccounted for spending will burden us all for generations to come.
Fortunately for them , precious few of their supporters understand this.
Excuse my limited understanding of debt..but I understand debt to be borrowing of funds at a certain rate to use those funds now for something that will be greater in worth than the borrowed funds plus the interest in the future…e.g borrow $500,000 over ten years to by a house now that when the debt is paid off in say 10 years, the house will at least be $700,000….$500,000 + $200,000(interest)….if not it has become a bad investment…..Some how I think this current “borrowing” of 500 millions
will be far less when the debt is paid off….Please correct me if I’m wrong
Andrew Bissell
US 10 year yield is about 2.97%. Bermuda issued 10 year debt at 5.603%. Therefore the debt was issued at 2.633% above the “risk-free” rate or + 263 basis points to AAA US debt.
The Finance Minister goes on to compare yields of “UBP” issued goverment debt without presenting data for where the risk free rate was at the time.
In 1997, US 10 year yields were between 7.0% and 5.6%, so if the “UBP” debt attracted an interest rate of 6.72% on their 10 year notes, in the worst case scenario, the debt wasa issued ar 1.12% (112 basis points) above the risk free rate.
This is a much tighter spread to US debt and shows that the market perceived less risk in Bermuda issued debt at that time. Or does it? Many factors affect bond issues, far too many to make these broad generalisations. It is clear to me that the Finance Minister should stick to politics and stay as far away from economics as possible.
I think the main issue is whether or not Bermuda should be issuing debt at this time. Does it make sense?
The next issue if to look at 10 year yields on other AA rated government debt and compare our bond issue at 5.603%.