A closer look at Government’s bond offering
The Government of Bermuda recently announced the launch and sale of yet another large tranche of Bermuda bonds (called Senior Notes), some $475 million USD worth paying 4.138% interest annually, with a fifteen-year maturity date of November 2023.
Investment securities for sale cannot be simply placed out into the world with an announcement where someone resembling a cashier collects the proceeds and issues a bond (or equity) certificate.
The management of a new security offering is a highly technical process involving legal, accounting, insurance, finance and investment bank supporting teams that produce the final security document.
In general, the bank(s) that actually promotes, manages and underwrites the security issuance steps into (or continues) the process is called the bookrunner, lead-manager, arranger, underwriter, etc.
It is that investment bank’s responsibility to appropriately manage the sale, the delivery, the electronic custody of the securities, as well as backstopping the offering to assure sufficient interest and stable valuations.
HSBC is listed as the sole Lead Manager and Bookrunner with Butterfield Bank listed (in the preliminary offering) as Co-Manager.
The highly detailed (92 Pages) preliminary offering memorandum circular is issued for perusal by potential investors in order to provide them with an overview of the bond issuer (in this case, the Bermuda Government) with the following information,
n The Bermuda economy
n The Government’s forward looking statements
n Summary of economic conditions
n Risk factors that can be incurred investing with a foreign government
n Description of the use of the proceeds
n History and overview of the island of Bermuda
n Discussion of current Government Public debt
n Description of the senior notes and plan of distribution,
n Enforceability of civil liabilities
n Taxation issues arising for some foreign investors, and other matters.
The structure of these bonds and intended distribution is for qualified institutional buyers.
It was unclear at the time or the posting of this article if the bonds will be available for resale to smaller investors, including interested investors in Bermuda.
The bonds are listed on two Security Exchanges, Luxembourg and the Bermuda Stock Exchange.
The Senior Note Offering document starts with a lengthy disclaimer that (in part) states to the interested investor that in “making an investment decision regarding the notes, you must rely upon your own examination of the Government, the terms of the offering, including without limitation, the merits and risks involved.
It further notes that the Government accepts full responsibility for the accuracy of the information contained therein, and that to the Government’s knowledge and belief there are no other facts of omission that would make any statement misleading.”
Forward Looking Statements (Projections) regarding the Government.
Next presented is the information, events, or developments that the current Government expects (or anticipates) will or may occur in the future.
These are projections only, the events haven’t happened, they may not happen, and there is uncertainty even if they do happen, that may make the financial results significantly different than the original assumptions.
This has been the case, for example, with government revenue projections for this year of $930,000,000 million that had to be revised downward several months ago to $870,000,000.
The following list is not all inclusive but points out the difficulty in projecting any fiscal, political, or other event or development and how it may affect the issuance and subsequent repayment of a bond offering:
n Changes in political or economic conditions in Bermuda and globally;
n Government’s financial condition and ability to increase revenues and reduce expenses;
n Legislative, regulatory, and other initiatives affecting international businesses in Bermuda;
n Changes in tax laws in the United States, Bermuda and other major financial centres that may affect the attractiveness of financial services in Bermuda;
n The effect of economic conditions in the US or Europe that may result in lower demand for financial services or the tourism product in Bermuda;
n The competitive effect from other jurisdictions on Bermuda’s financial services / tourism industry;
n Conditions in lending markets, domestic, international and multilateral capital markets that could effect the government ability to finance budget requirements, and to refinance outstanding debt and other obligations or to finance new projects
n Effect of weather, climatic and geological occurrences, such as hurricanes;
n Terrorism on a global basis that may effect Bermuda’s financial markets or tourism product;
n Changes in global interest and exchanges rates;
n A reduction in our foreign currency reserves;
n Financial condition and liquidity of financial institutions in Bermuda;
n Trade and tariff policies of Bermuda’s trading partners;
n Unanticipated declines in tax revenues;
n Revisions or changes in economic, financial and statistical information and other factors identified in this memorandum.
Next, in Part 2, we look at the risk factors of investing in this bond offering, a summary of our economic conditions as presented by the Government of Bermuda, a summary of historical consolidated economic and financial information, the reasons for the bond sale, and a very detailed review of our current and future debt obligations.
As stated above, this preliminary offering memorandum circular is a highly detailed document offering a very interesting view into amount and type of financial, legal, economic and legislative information required to be provided to interested investors.
If you have the time, you should take the time to read the entire 92 pages.
It is illuminating.
*** As of the date of this article, the author was not able to obtain the final offering memorandum for complete verification.
Thus, some items and information may have changed.
Martha Harris Myron CPA PFS CFP (USA) TEP is Director of Tax Services, and a cross border financial planning specialist at Patterson Partners Ltd as well as a member of the American Citizens Abroad Professional Tax Advisory Council. http://www.aca.ch Patterson Partners Ltd. provides integrated cross-border tax, estate, investment advisory and related strategic planning services through entities in Bermuda and the United States.
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