Borrowing money to pay for borrowing money
A small newspaper notice on November 8 noted that the Bermuda Government was “rolling the government debt” in a repurchase and a new bond tender offering set for November 15.
As this article went to press last Thursday, the results are already in. However, no information was readily available as regards the sales of new bond notes, and the new interest rates. The issuance of new notes is necessary to generate the cash to redeem the older bond notes outstanding. See announcement link below.
The current thinking is that by redeeming a tranche of the current government bond debt and putting forth bids for new bonds, Government would be able to “lock in” more current interest rates — given that the US Federal Reserve was intending to raise the Fed rate again this year.
I have three questions?
1. What were the current interest rates now on those current bonds outstanding, and what will the interest rates on the [new] notes be? How do they compare?
2. Are we tendering new bond issues in order to raise additional capital after the $424 million notes are redeemed? According to the Minister of Finance, Curtis Dickinson: “As announced in the 2018-19 Budget, the Government will have to incur new borrowing of $89.7 million to finance the 2018-19 deficit along with the rollover of a $135 million credit facility.”
3. What was the thinking of the notes term maturities from ten to 30 years?
According to LatinFinance, in its article “Bermuda looks to set new benchmark” on November 12, the Government plans to fund a bond buyback with the sale of at least $500m in new notes. Bermuda is preparing to sell at least $500m in new notes next week, raising funds for a bond buyback.
Citi and HSBC were said to be leading the Rule 144A/Reg S bond deal after a delegation from Bermuda met investors in New York and Boston. The bonds will likely mature in ten to 30 years, according to sources. It was said Bermuda could issue the new bonds as early as November 15, the day an offer to buy back up to $424m in outstanding notes expires.
Bond issuances generate interest payment obligations. As we all know by now, issuing bonds brings in ready cash, but interest has to be paid, generally, semi-annually, on the principal based on the coupon rate set at the time of sale.
Government has borrowed cash from investors (by issuing bonds) for at least the last 20 years. Research beckoned to satisfy my curiosity as to just how much interest has been paid for the use of this money.
Take a look at the chart.
We see total interest already paid out for twenty years on accumulating interest-bearing debt fast approaching more than $872 million. Certainly, at this increasing rate, interest expense will exceed almost a billion dollars next year. The chart also illustrates a manageable debt load of around $160 million for those early years (1997-2007). Interest payments were manageable (around $100 million) while the debt liability was low compared to other financial indicators, such as GDP.
As the recession hit in 2008, along with numerous other mitigating factors, our debt has increased significantly every year. Pension liabilities increased, health insurance liabilities increased — filling the liability section of the Government Consolidated Fund Financial Statements.
As at March 31, 2017, Consolidated Fund
• accrued pension liabilities stand at $937 million;
• accrued health benefits are at $464 million (not listed);
• government interest bearing debt at $2.5 billion.
Keep in mind that these numbers do not represent the total government accrued liability positions. That unfortunately is larger, estimated close to $4 billion as at close of the next financial cycle, according to our Auditor-General, Heather Thomas, CPA, CGMA.
The numbers speak for themselves.
Note that these are actuals or close estimates per the statements. In a few instances, I could not find complete data at the time of writing this article, such as statements on the government website were incorrect years showing up as duplicates of other years. I think, however, the numbers are sufficiently verifiable that you get the picture of increasing debt, interest and pension liabilities.
Literally, rolling debt really means that we are borrowing money to pay for borrowing money.
Readers, extensive skimming through 20 years of financial statements and audited reports was depressing, to say the least. Taken as a whole, the cumulative totals are significantly concerning.
How did we get to these huge, some would say almost insurmountable debt positions after years of conservatively trundling along?
Will the principal be paid in my lifetime remaining?
I think not. Call me cynical, call me realistic. I call it as I see it.
And what about Bermuda-resident small investors. Why don’t we ever have a chance to keep some of this debt home-grown, allowing us to fund some of it? The interest coupon rate is extremely appealing right now. Think of it, interest earned and deposited in our forgiving pockets, instead of foreign investors — who view the holdings as another commercial transaction.
I’ve campaigned on this right to invest in government bonds locally for years. It has never received an acknowledgement from anyone in Government.
Coming next in the financial series: how to understand a financial statement, particularly, those of the Bermuda Government. These statements are publicly available, but honestly, most of us are turned off just looking at so many numbers — financial statements now more than 200 pages. I will take on the job of making it easier for you, if you feel up to it, to check up on your government’s management of the public purse.
Why do you need to understand?
Because this is your money. Enough said.
• Bermuda Government to rollover $424 million debt. https://tinyurl.com/y7l9kj78
• LatinFinance: https://tinyurl.com/ycejd7h9
• The Government of Bermuda announces the expiration and final results of its tender offers. https://tinyurl.com/yb2t8333
Martha Harris Myron CPA CFP JSM: Masters of Law — international tax and financial services. Dual citizen: Bermudian/US. Pondstraddler Life, financial perspectives for Bermuda islanders and their globally mobile connections on the Great Atlantic Pond. Finance columnist to The Royal Gazette, Bermuda. All proceeds earned from this column go to The Reading Clinic. Contact: email@example.com
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