Govt raises $475m with bond sale
Government yesterday raised nearly half-a-billion dollars in a bond sale that was four-times oversubscribed.
The mostly international investors who bought the $475 million of ten-year notes will be paid an interest rate of 4.13 percent.
Last night the Finance Ministry said that $180 million of the proceeds represents new debt. This moves the Islands net borrowings to around $30 million shy of the debt ceiling of $1.45 billion.
Most of the money raised will be used to refinance shorter-term debt carrying a higher interest rate than the notes sold yesterday in order to cut borrowing costs. For example, the refinancing of a $200 million, 4.95 percent loan facility, due in 2014, will cut interest payments on that sum over the next two years.
The preliminary offering memorandum distributed among potential investors also indicated that some of the proceeds would be used to pay off $120 million in overdrafts with local banks, and some to fund capital expenditure programmes.
There was no shortage of buyers after the deal was announced at 9.55am in New York yesterday. Within an hour, demand was approaching $500 million.
The final order book totaled $1.3 billion, representing a four-times oversubscription. This enabled the Government to both tighten initial price guidance and upsize the transaction, the Finance Ministry said.
The sale took place on the same day as Fitch downgraded Bermudas sovereign bond credit rating to AA from AA+. The significance of a lower credit rating is that it can increase a governments borrowing costs, as investors demand higher interest rates to lend to lower-rated countries.
But yield-starved investors looking for alternatives to a volatile stock market were happy to pay a significantly lower interest rate than two years ago when the Bermuda Government last went to capital markets. On that occasion, Government sold $500 million of bonds with a 5.6 percent interest rate.
The transaction achieved the lowest fixed rate bond yield ever for the Government of Bermuda, thereby substantially lowering the Governments debt cost burden as well as its cost of funds moving forward, the Finance Ministry stated.
The low pricing and very large order book confirmed that the markets continue to have a very favourable view of the Bermuda credit story despite ongoing economic challenges and the general volatile backdrop stemming from the European debt crisis.
Total interest payments on the notes will be just over $19.6 million per year.
Government debt has skyrocketed over the past five years and, according to the bond sale prospectus, net debt stood at $1.24 billion before yesterdays sale.
The $180 million of new debt from yesterdays proceeds will increase the net debt to almost $1.42 billion, just under the $1.45 billion debt ceiling.
The sale follows a roadshow across Europe and the US, which involved Finance Ministry officials courting investors. The team included Financial Secretary Anthony Manders, Director of International Business Travis Gilbert and Economic Adviser Hasan Durham.
The team was also supported by Director of Budget Tina Tucker and key senior officials in the Accountant Generals Department and the Attorney Generals Chambers.
Around two-thirds of the notes were snapped up by US investors. Another 30 percent went to Europe, and three percent to Asia. By investor type, fund managers bought 75 percent of the offering, insurance companies and pension funds 12 percent, and banks ten percent.
The Finance Ministry said more than 106 investors placed orders, from countries including Austria, Belgium, Bermuda, Brazil, Chile, France, Germany, Hong Kong, Israel, Italy, Luxembourg, the Netherlands, Singapore, Switzerland, the UK and the US.
HSBC Bank of Bermuda, HSBC Securities (USA) In., Butterfield Bank and US law firm Milbank Tweed were strategic partners in the process, said the Finance Ministry.
See todays Business pages for story on Fitch downgrade.
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