On the morning of Tuesday, June 26, 2012 at 9.55am, the Government of Bermuda announced in New York the sale of 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. $472 was realised, three million less than the total offering, net of expenses, however, that sum does not appear to include the amount paid to the lead manager/underwriter for their services.In a sheer coincidence, seconds earlier at 9.53am on the same date and day (according to their website) Fitch Rating Service issued a press release downgrading Bermuda’s long-term foreign currency and local currency issuer default rating (IDR) to AA.The original offering was geared for qualified institutional buyers and issued in denominations of $200,000 with integral multiples of $1,000.It is still unclear at the time of the posting of this second article if the bonds will be available for resale in lower minimum purchase lots to smaller investors in Bermuda, or elsewhere.The bonds (Senior Notes) are now listed on two Security Exchanges, Luxembourg and the Bermuda Stock Exchange under the ISIN #US085209AB07 and US G10367AA14.What is a bond? How do you value a bond? Is a bond safer than a stock? What is the benefit to you at the end of the day?A bond is a security, but you, the investor by purchasing the bond are actually loaning your money to the bond issuer that can be a company, a municipality, or a country. In return for the use of your money, you are promised (not guaranteed) an interest rate payment, generally semi-annually, accompanied by an additional (and most important) promise to repay the principal on this bond (loan) at the stated maturity date, i.e. two years, five years, and fifteen years, etc.Determining a bond’s value is a complex matter, compounded by the effect of the prevailing interest rate in global capital markets, the credit rating of the issuer, the economic, political, and financial stability of the country, the ability to repay the principal, the currency fluctuations, the demand for the product and its perceived benefit to the investor, and other risk factors.The final responsibility, also called the burden of discovery and assessment of risk, for any interested investor is to personally carefully review all information available on any potential security investment in order to make an informed decision.The primary information that legally must be made available with the bond offering is the Offering Memorandum. Last week, we provided a partial commentary of the highly detailed (92 Pages) Government of Bermuda bond memorandum issued for potential investors’ examination. The final memorandum reiterates that information, generally, although now only HSBC Bermuda is listed as the Lead Manager. There is no Co-Manager.The memorandum subtitles encompass a broad range of information, including presentation of economic, financial and statistical information, forward-looking statements regarding the Government of Bermuda, a two -page summary description of Bermuda’s economic and debt conditions along with credit ratings and historical consolidated financial information, risk factors incurred in this contemplated investment, the stated use of the proceeds, a long review of the island of Bermuda’s complete infrastructure (63 pages), balance of payments, foreign currency reserves money supply (in a negative position), public finance and public debt, detailed description of the Notes, enforceability of civil liabilities under United States federal securities laws, taxation impact, plan of distribution, legal matters and other information.Summary of the Bermuda Economy based upon Bermuda Government projections indicates that Bermuda’s economy is based primarily on international business and tourism where GDP (Gross Domestic Product has declined for three years 2010, 2011, 2012. However, the Ministry of Finance expects to see moderate growth in 2013 and 2014, given positive continued recovery on a global basis.As at year 2011, 72.1% of the total balance of current account receipts of foreign exchange was contributed by international business and tourism.The Use of Bond Proceeds — in general terms that could be called the Reason for Taking on More Debt states that “the Government intends to use the net proceeds to repay all of our outstanding short-term indebtedness with local banks (estimated at $120,000) and a BD$200,000 million credit facility with a local bank that matures in 2014, with the balance to be used to fund capital expenditure programs and for other budgeted governmental purposes.”\This represents a total of $320 million used to paydown current debt, leaving $192 million for other budgeted purposes.The statement does not address the increased interest cost of carrying the government’s total debt burden, now estimated at more than $90 million interest expense per year.Public Debt — additionally, under this section, we see the list of recognised public debt incurred (at March 31, 2012 of $1billion350 million) along with various additional loan guarantees that the ,Government has also guaranteed to date that are not included in the public debt numbers:n Guarantee of repayment of principal and accrued interest from defaults on the National education guarantee scheme.n Letter of comfort to Butterfield Bank on behalf of the Bermuda Housing Corporation (BHC) which states that “to the extent that BHC operates programs that do not break-even, the Government will appropriate annual grants to enable the BHC to comply with its legislation.”We take this to mean assistance with meeting BHC debt obligations in the event of a BHC customer default to Butterfield Bank.n Guarantee $10 million loan to Wedco to complete the new Sewage Treatment Plant at Dockyard.n Guarantee agreement with Butterfield Bank ($200 million) in connection with the issuance of preference shares issued by Butterfield Bank during the ten-year term of the guarantee, along with being the guarantor of the dividend payments relating to the preference shares.n Irrevocable guarantee of approximately $260 million to Paget Health Services Limited for completion of the King Edward Memorial Hospital redevelopment.n Unconditional guarantee to Butterfield Bank in consideration of the bank granting a $36 million credit facility to Wedco for a 100 unit residential housing development at West end.The Government of Bermuda bond memorandum is a snapshot in time of the state of Bermuda’s finances. Read this memorandum. It is illuminating.Martha Harris Myron CPA PFS CFP (USA) TEP is Director of Tax Services, a cross border financial planning specialist at Patterson Partners Ltd and a professional member of the American Citizens Abroad 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. For additional information, please contact mmyron@patterson-partners.com or call 296 3528 http://www.patterson-partners.com