Disaster recovery bond idea floated

  • Bond boost: Greg Wojciechowski, CEO of the BSX (File photograph)

    Bond boost: Greg Wojciechowski, CEO of the BSX (File photograph)

  • Investor demand: Martha Harris Myron, personal finance expert (File photograph)

    Investor demand: Martha Harris Myron, personal finance expert (File photograph)

A disaster relief recovery bond could help the Bermuda Government meet some of the extra borrowing needs it faces as a result of the Covid-19 crisis.

Some are floating the idea as a way to also get the community involved in supporting the economic relief effort, while receiving a return on their Bermuda dollars.

Greg Wojciechowski, chief executive officer of the Bermuda Stock Exchange, and Martha Harris Myron, a personal finance expert, both believe that such a bond would garner strong support from investors large and small.

Curtis Dickinson, the finance minister, said on Friday that the Government expects unbudgeted expenditure related to the Covid-19 crisis of up to $80 million for the current fiscal year, while the shortfall on projected revenues could be as much as $200 million.

The result is that the Government is close to finalising loan facilities totalling $170 million with local banks and its net debt burden is creeping up towards $3 billion.

The BSX has listed Bermuda Government bonds before, including a $50 million Bermuda-dollar issuance in late 2013 that drew healthy demand from investors.

Mr Wojciechowski said: “A disaster recovery bond would be a funding vehicle for the Government to provide relief to the hardest-hit parts of our economy and retain jobs.

“It would also tap into the spirit of unity we’re seeing on the island in this time of crisis, by creating a chance for locals, including mom and pop investors, to participate while also taking advantage of a new local investment opportunity that could be listed on the BSX.”

Mr Wojciechowski added: “Disaster recovery bonds have a proven track record of success in helping communities to recover from catastrophic events.

“Governments around the world have allocated and pledged new money for measures including tax breaks, rent subsidies, one-time cash payments to lower-income households, wage subsidies for small and medium-sized firms, aid for medical professionals and those affected by school closures.”

In the United States, in particular, such bonds have been issued to help areas stricken by hurricanes or floods, and they have been successful in stimulating large investments in catastrophe-damaged communities such as Louisiana and New York City, according to the Brookings Institution.

“A disaster recovery bond would give the Government much needed extra capacity and flexibility to deal with unforeseen and extraordinary demand on capital,” Mr Wojciechowski added.

“If the bond is priced correctly, I think there would be great demand from investors. When the Bermuda Government previously placed a $50 million Bermuda dollar bond in 2013, it placed very successfully and was oversubscribed.

“I see no reason why that would not be the case again and the BSX would be honoured to be part of the effort to help Bermuda recover from this crisis.”

Martha Harris Myron, the personal finance columnist for The Royal Gazette, believes that hundreds of millions of dollars could be raised locally from a government bond denominated in Bermuda dollars.

Investors would be keen to get involved, she said, in the spirit of “we’re all in this together”.

“I really believe they could raise $300 million, maybe even more,” Ms Harris Myron said.

“There are people with money in Bermuda. The Government is paying 4.75 per cent on the last the US dollar government bond they issued. If they paid the same here, I can tell you they’d be oversubscribed.

“It would help to keep the Bermuda dollars circulating. And it could at least help with funding infrastructure and make up for the fall in payroll taxes.”

Added advantages of a Bermuda dollar bond are that investors are local and with interest paid in local currency, those dollars would be likely to stay in the local economy.

Credit rating agencies also tend to look more favourably on government debt being funded in local currency and backed by local investors.

That gives the Government good reasons to try to sell more of their debt in Bermuda dollars, Ms Harris Myron said.

“Not only that, but Bermuda residents would be more forgiving than the foreign markets,” she added. She explained the Government could issue deferred interest coupon bonds, such as zeroes, deferred coupon or step-up bonds, that would provide more breathing room in liability payments.

Bermuda investors might not mind those structures because they resemble term and CD deposits, where interest is not paid out until maturity, she said.

The Government last went to the capital markets in November 2018 when it sold $620 million in US-dollar denominated ten-year notes that give investors a 4.75 per cent return.

Largely a refinancing exercise that took advantage of low interest rates, it also served to push back the next major maturity of the Government bonds until 2023, Mr Dickinson said at the time.

AMENDMENT: This article has been amended to clarify comments made by Martha Harris Myron.

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Published May 12, 2020 at 8:00 am (Updated May 13, 2020 at 1:59 pm)

Disaster recovery bond idea floated

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