Moody’s Downgrades Bermuda’s Rating To Aa3

[Updated] After placing the island on “review” last month, ratings agency Moody’s today [May 16] formally downgraded Bermuda’s rating to Aa3 and changed the outlook to negative.

A statement issued by the Company said, “The downgrade was prompted by the steep rise in government debt and the lack of an economic recovery from the downturn at the time of the crisis. Government debt has risen from 5.9% of GDP at the end of the 2007-08 fiscal year to an estimated 28.1% at the end of 2012-13.

“The newly elected government’s first budget, introduced in February, projects a large deficit that will raise this ratio further in the coming year to over 30%.”

“Despite these negative trends in government debt and the economy, Moody’s says that the Aa3 rating is supported by the island’s very high per capita income, its strong institutions, and its still moderate level of government debt in relation to similarly rated sovereigns. At over $80,000, per capita income is among the highest in the world,” said Moody’s.

A Government spokesperson said, “The Ministry of Finance recognized that continuing government deficits and weak economic growth could put Bermuda’s sovereign rating at risk of a downgrade by one notch. Moody’s have adjusted our sovereign bond rating downwards to Aa3.

“We note however, that in so doing, Moody’s affirmed that our rating is supported by very high per capita income, strong institutions, and our still moderate level of government debt in relation to similarly rated sovereigns.

“While the ratings adjustment was not positive, the Ministry of Finance also noted that the adjusted rating remains in the top tier of the ratings matrix. At Aa3, our sovereign bond rating is only three notches below the highest rating of Aaa.

“Moody’s continues to endorse the Island’s institutional strength and the island’s very high per capita income. Government remains optimistic about future prospects for growth and will continue to press ahead with our Jobs and Economic Turnaround Plan which involves providing balance between responsible economic growth and disciplined financial management,” concluded the spokesperson.

The statement from Moody’s is below:

Moody’s Investors Service has downgraded Bermuda’s government bond rating to Aa3 from Aa2 and placed a negative outlook on the rating. In addition, the foreign currency bond ceiling was moved to Aa2 from Aaa and the foreign currency bank deposit ceiling was downgraded to Aa3 from Aa2. Furthermore, the local currency bond and deposit ceilings were moved down to Aa2 from Aaa and Aa1, respectively. These actions do not affect the Prime-1 country ceilings for Bermuda. The rating action concludes the review for possible downgrade that was initiated on April 3.

RATINGS RATIONALE

The downgrade was prompted by the steep rise in government debt and the lack of an economic recovery from the downturn at the time of the crisis. Government debt has risen from 5.9% of GDP at the end of the 2007-08 fiscal year to an estimated 28.1% at the end of 2012-13. The newly elected government’s first budget, introduced in February, projects a large deficit that will raise this ratio further in the coming year to over 30%.

Moody’s says that the rise in government deficits and debt was primarily due to a prolonged period of declining GDP, which began in 2009 and looks likely to continue through 2013. Moderate growth may resume in 2014, but the long-term decline in the tourism industry and less dynamic growth in the insurance sector could limit the pace of future growth.

Despite these negative trends in government debt and the economy, Moody’s says that the Aa3 rating is supported by the island’s very high per capita income, its strong institutions, and its still moderate level of government debt in relation to similarly rated sovereigns. At over $80,000, per capita income is among the highest in the world. The country’s regulatory institutions have facilitated the development of an important international business sector, especially insurance and reinsurance. Finally, the current level of government debt is close to the 29.4% median for sovereigns in the Aa3-A2 rating range in which Bermuda falls under Moody’s Sovereign Bond Ratings methodology.

RATIONALE FOR THE NEGATIVE OUTLOOK

The negative outlook on the Aa3 rating reflects uncertainty over the government debt trajectory over the medium term. Moody’s expects the government to address the rise in the debt with further policy actions in the coming year. However, the poor performance of the economy means that their ability to do so remains constrained. If the economy begins to record positive growth and the government is able to contain the rising debt trend, the rating outlook could return to stable. However, a continuation of the economic downturn and a lack of significant fiscal policy measures could prompt a further downgrade of the rating.

The principal methodology used in this rating was Sovereign Bond Ratings published on 9-Sep-2008. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating..

Update 1.40pm: Shortly after Moody’s announced they downgraded Bermuda, they confirmed they downgraded the ratings of the Bank of N.T. Butterfield & Son Limited. The rating outlook is stable.

A statement from the ratings agency said, “The downgrade reflects Butterfield’s still-high level of nonperforming assets (NPAs) and the limited prospect of it improving in the near- to medium-term given Bermuda’s ongoing recession.” Read the full statement here.

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