Will there be a Bermuda bond offering?
Launching a bond offering. The last time the Bermuda government borrowed money on a long-term repayment plan (this did not include the revolving cash overdrafts), the Bermuda public knew little of the details even after the bond deal was announced. It was a fait accompli in French meaning in Bermudian, a done deal. According to The Royal Gazette headlines of July 10, 2010, more investors wanted to buy these bonds than the amount that was actually issued ( http://www.royalgazette.com/article/20100714/BUSINESS/307149991 ).
At that time, 146 investors, ten percent from Bermuda, 60 percent from North America, and the remaining 40 percent from Europe, Asia, and the Middle East purchased a total of $500 million worth of bonds paying 5.6 percent annually from the Bermuda government. However, even though 14.6 investors were from Bermuda, the average Bermuda resident did not receive the opportunity to even decide whether to participate (or not - depending on how one viewed Bermuda government finances at that juncture).
That public bond deal took place over a year and a half ago. We don’t know who bought the bonds, but we do know each and every bit of that $500 million has to be repaid by us (the government) in the Year 2020, along with millions of dollars in interest each and every year in between.
And now the trip to the well must be made again. Cash is needed to fund current expenses and service the existing debt. If the 2011-2012 Government budget announcement is implemented later in the year, it appears that there will be Bermuda dollar bonds offered to local investors, savers, and pensioners. The delayed launch gives you plenty of time to do some basic research, read up on how bonds work, consult with your advisers and make an informed decision. Keep in mind, however, that this type of a local bond offering may differ from bonds offered on competitive global market exchanges.
Here are some important points you should know about buying bonds.
1. What kind of interest rate will be offered?
2. What currency will the bonds be issued in?
3. What is the credit rating of the government issuing the bonds?
4. How long will it take to get your principal investment back? Is the return of your principal guaranteed?
5. Will you be allowed to cash in your bond investment early, if you have an emergency situation?
6. What is the collateral backing these bonds?
7. The most basic question of all, since bonds are not term deposits like cash held in a bank, how do you actually buy a bond?
From the beginning: a bond is a promise to pay you interest over a certain period of time (say ten years) and at the end of the term, repay the amount you invested (your principal). A bond is not an investment; it is a loan of your money to a government or a company. You will not receive shares or a stake in the company or government, nor will your bond principal appreciate over time. Yes, the bond value will fluctuate due to changes in capital market interest rates, but at the end of the term, repayment will be the exact amount you invested if, the big if, the company or government that borrowed your money is profitable and solvent.
Putting the last question first. How do you buy a bond? Initially, the most important participant is the bond issuer, in this case a government. The issuer of the bonds is the one who needs the money. Everyone else, who assists in structuring the bonds, placing and marketing the bonds, possibly buying the bonds from the government for resale, is there to help (for a fee of course) in raising the money.
Primary market. Bonds can be sold at a primary institutional auction, and on the secondary investor capital market. For instance, US Treasuries are first sold at regularly schedule public auctions. In fact, there is one taking place next week where billions will be put up for sale. Generally, extremely large financial institutions take big chunks of bond positions at these auctions, but small investors can also place orders (see http://www.treasurydirect.gov/ ).
Secondary market. Using the US Treasury auction again as an example, once a large financial institution takes possession of (owns) the purchased bonds, i.e. JP Morgan, then the bonds are placed for resale on the secondary market. There, the bonds are bought and sold on a vigorous highly liquid market day and night, week in, week out. The bond traders charge a fee on top of the market price for every sale.
The Bermuda bonds may be sold to the public by an agent (generally a bank or banks), who actually may not ever own the bonds, but may sell them to the public on behalf of the Bermuda government.
We won’t know if bonds will be offered, or how they will be sold until it happens. As is the case with any good investment decision, it is important to understand what you are buying, verify that the securities will complement your current financial position, and leave you with the satisfaction that you have made a good choice for your financial security.
Is it a good idea to buy bonds? Only you can decide that.
It is my goal to give you enough information to help you make that decision. Next we explore the rest of those buying decisions in April.
This article is not personal investment advice, tax advice, legal advice, or any other individual advice for you, the reader. I do not represent you, nor am I your personal adviser. Therefore, you cannot rely upon general education information presented in this article as advice specifically relevant to your personal financial situation. Please do your homework, or consult with a qualified financial representative before you invest.
On the web: Prior articles on bonds in Bermuda can be found in The Royal Gazette, February 18, 2012, Bond Interest Rate Irrelevant, If Principal Not Returned ( http://www.royalgazette.com/article/20120218/COLUMN07/702189938 )
And March 03, 2012 Bonds, Bootstraps, and Bottomless Pits ( http://www.royalgazette.com/article/20120303/COLUMN07/703039965 ).
US Treasury bonds http://www.investorguide.com/igu-article-576-bonds-treasury-bonds.html
Anatomy of a bond http://library.findlaw.com/2000/Mar/1/130778.html
Martha Myron, CPA CFP(US) TEP JP www.marthamyron.com is an international Certified Financial Planner™ providing Financial Counsel for Cross Border Living™ on international tax, estate, and retirement strategies for Bermuda residents with US connections, and US citizens living and working abroad. Member of the American Citizens Abroad Tax Advisory Council. www.americansabroad.org Contact mmyron[AT]patterson-partners.com or 296 3528 at Patterson Partners Ltd.
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