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Why a Bermuda United Together bond makes sense

How it works: this 1888 US railway company $1,000 bond certificate has coupons attached. These coupons would be redeemed for an interest payment of 4.4 per cent ($44) each year for 30 years. At the end of 30 years, the certificate would be presented to the issuer’s bank and the original $1,000 would be repaid and the interest payments would finish (Photograph supplied)

This is part one of suggestions to Curtis Dickinson, Minister of Finance, to raise capital and jump-start the “new normal” Bermuda economy. The three most important responsibilities every government has towards its citizens, according to the World Economic Forum, are:1, Protector — protecting citizens from violence.2, Provider — government can cushion the inability of citizens to provide for themselves, particularly in the vulnerable conditions of youth, old age, sickness, disability and unemployment due to economic forces beyond their control.3, Educator — government must invest in citizen capabilities to enable them to provide for themselves in rapidly and continually changing circumstances.Our Government has utilised significant financial safety net resources to assist thousands of unemployed temporarily, or redundant individuals who social distanced at home due to the Covid-19 pandemic. No one could have predicted with any certainty that the devastating pandemic — a once-in-a-lifetime event — would drastically, physically and financially impact government, businesses and families’ resources. The Bermuda Unite Together bond offeringWhy not launch a Bermuda bond for Bermuda residents in Bermuda dollars offering a healthy interest rate and principal repayment?Now, we have that chance to help government and benefit ourselves. After all, we’re already paying taxes to government on our salaries and wages, land, property conveyances, vehicles, estates, trusts, the infamous sugar tax and others. The Bermuda Stock Exchange currently list a number of outstanding Bermuda Government bond issues, all in US dollars, ten-year maturities with interest rates ranging from 3.7 to 4.75 per cent, held by mostly foreign investor bondholders. One example: Government of Bermuda 4.75 per cent senior notes, due 15 February 2029 — RegSSo, why not launch a Bermuda dollar bond offering for all Bermuda residents. While I dislike the mantra “We are all in this together,” actually, we are. Why not owe interest to ourselves this time around?What would a Bermuda bond offering look like?Overview of a bond investment structureLet’s take a general overview of basic bond structures.Bonds are debt, not equities. They are a much more sophisticated form of a loan, legalised into a security contract that can be publicly-traded. Par valueA bond, issued in $1,000 (and other) increments by a country (Bermuda), is a promise to pay back the principal and interest as listed on the offering certificate — that is 100 per cent — in this case $1,000 — regardless of the original purchase price or trading prices thereafter. You are a creditor, and with your purchase you have loaned your cash to a company, a state, a municipality, or a country in return for the interest income consideration. Bond investors (you) never own any part of a company, you are just a creditor. You have no ownership stake, no long term appreciation. But if you hold a high grade bond to maturity, while not guaranteed, you will receive the principal back. Bond credit ratingsBonds are given credit ratings by rating agencies — actually, the issuer of the bond receives the rating. Great sovereign debt and fiscally sound companies will receive “investment grade” ratings from AAA to BBB. Bermuda’s current credit rating is A+.Portfolio diversification High-grade bonds are considered less risky than stocks and are considered a portfolio diversification with a smoothing effect as bonds values, generally, are non-correlated with equity prices. When equity values across the board tank, high grade bond prices generally, rise. Bond coupon rateThis is the annual rate of interest to be paid, generally, in two semi-annual payments. The coupon rate does not change, but the yield on the bond will, depending upon the bond value at anytime in an open market. The interest rate is called the coupon rate because, in the old days, the bond was issued in paper certificate form with little coupon tags attached. The bond holder would submit the current dated coupon at the teller window to receive interest due (See the image with is article). Kinds of bondsBonds come in numerous types, and some are very complicated. We will discuss just five: the first bond-type very familiar, the others not so much. Bond interest does not compound like a term, fixed or certificate of deposit. • The “plain vanilla” bond is issued in 1,000 increments (face value) with a stated maturity date. The coupon rate (interest rate) is the same every year, with interest paid semi-annually. The Penn Railroad bond was issued at $1,000 paying 4.4 per cent interest, semi-annually for 30 years.A $1,000 face value, total interest $44 a year, or $22 twice a year. • Coupon interest deferred bonds. The interest on these types of a bond is delayed until a certain later time or at the maturity of the bond. While not held in a bank like a certificate of deposit, it resembles such due to the accumulation of interest paid at maturity. Moneywise discussed this bond structure on Tuesday as an alternative for government to a plain vanilla Bermuda bond with the semi-annual interest payment schedule as above. The interest could be accrued, and deferred until later in the bond maturity term, helping with cashflow in the near term. • Zero-coupon bond. Here, the interest keeps on adding till the maturity of the bond. There is no coupon payment in between. On maturity, a lump-sum amount is paid to the investor. Generally, sold at a discount to par value.• Single rate deferred bond. These deferred interest bonds pay accrued interest on maturity at a single coupon rate, along with return of principal.• Step-up bond — also known as a toggle note. All accrued interest can be after a certain time, or at full maturity. In return for the delay, at maturity of the bond the issuer will pay all accrued interest instead at a rate of 5.5 per cent.• Payment in kind bonds. A company — the bond issuer — can offer to pay interest in another financial instrument instead of cash interest payments. Later the instrument can be exchanged for other financial assets of the company, helping the company avoid decreasing cash during a liquidity crunch. What would be the minimum purchase?The bonds could be offered in face value increments of Bermuda dollars, say $1,000, $5,000 and $10,000. This would allow just about everyone a chance to participate. Families could pool their money to purchase a five- or ten-year maturity. How long would the bond last — what are time frames to maturity?Bond principal repayment maturity dates could vary anywhere from five years to ten, or even a 20-year bond as dictated by the issuer (government). Can I sell my bond before it matures if I have to?I believe the Bermuda Stock Exchange will have an active trading platform for buying and selling these bonds. But, this is early days and I would defer to Greg Wojciechowski, BSX’s president and chief executive officer for his and the BSX board’s thoughts as to the Bermuda Unite Bond Issuance and how administration of said issuance would be listed on the local exchange. Why should you consider investing in a Bermuda bond?There have been positive and negative comments regarding this suggested bond structure. Both are valid for certain individuals and their personal circumstances. However, I would venture to say again that we are all in this together, and floating a Bermuda bond underwritten by us, the people of Bermuda seems like a good, financial way to bring about financial feelings of unity and support. After all, if Bermuda islanders own our government money, we are going to be far more enthusiastic, committed and vigilant in pulling out all stops to reinvigorate this economy. For individuals, families, and businesses, this offering could:• Be a local, transparent way to save for children’s further education; • Continue to assist unemployment and like-kind assistance for Bermuda residents;• Families could pool their savings to purchase one or several bonds to generate income;• A Bermuda bond can be another alternative to savings accounts.• Local dollar bond offering means Bermuda dollars stay in Bermuda.• Could be a component of pension plans providing it meets investment policy standards; • May allow for some mortgage backstops, keeping distressed property owners in their homes; • The funds will help Bermuda residents earn a bit of additional income, and will assist government in decreasing the budget deficit for the year.Finally, we are all in this together — as the pandemic phrase amplifies — and as hopefully conditions return to a new normal, why not be united in helping ourselves, our families and our community’s economic relief? Sources:• eFinance Management https://tinyurl.com/ybzdv85a• CSI Chartered Institute for Securities & Investments Lesson 7 CSI Bonds 6895115 https://tinyurl.com/yb2q82zt• World Economic Forum. Three responsibilities every government has towards its citizens, 13 Feb 2017, Anne-Marie Slaughter, CEO, New America https://tinyurl.com/y7f6yncn• Martha Harris Myron CPA JSM: Masters of Law — international tax and financial services. Pondstraddler Life, financial perspectives for Bermuda islanders and their globally mobile connections on the Great Atlantic Pond. All proceeds earned from this column go to The Bermuda Salvation Army. E-mail to: martha.myron@gmail.com