Bermuda Government’s two-bond buyback
On Wednesday of this week, in a mind-numbing 26-page reading challenge, the Bermuda Government announced an offer (tender) to redeem (buy back) for cash two of its issues of senior notes from the bondholder investors of record.
The senior notes in offer are listed on the Bermuda Stock Exchange under Listed Issuers Fixed Income:
• The first outstanding principal balance due of US$353,905,000 interest 4.138 per cent, maturation date January 3, 2023 with a hypothetical purchase price of $1,005.44 per unit above par value
• The second outstanding principal balance due of US$402,203,000 interest 4.854 per cent, maturation date February 6, 2024, with a hypothetical purchase price of $1,024.64 per unit above par value
• Plus accrued interest due on each as well to the exercise date of July 12, 2022.
Government has also issued the accompanying statement:
“The Government will determine in its sole discretion the aggregate principal amount of Existing Notes of each series validly tendered in accordance with the terms and conditions that it will accept for purchase. The Tender Offers are not conditioned upon any minimum participation by the holders of any series of Existing Notes but are conditioned on:
“ (a) the satisfaction or waiver by the Government of the conditions described in the Offer to Purchase,
“ (b) the closing of an offering of new notes (the "New Notes") by the Government (the "New Notes Offering"), which is intended to settle prior to or concurrently with the Tender Offers, and
“ (c) the dealer manager agreement relating to the Tender Offers not being terminated prior to or at the time of the settlement of the Tender Offers.”
Here is the key in plain English:
In order to redeem the old notes, two “New Notes Offerings” must be launched.
It is stated that “New Notes Offerings” will be solicited at the same time. One can assume that some investors may “rollover” an existing note investment to a new note.
What is not clear is whether the New Notes offerings will be issued at higher principal amounts (than the old Notes) and at what interest rates.
Further information on the “New Notes” was not available at press time.
Briefly, the mechanics of a bond security are not easily understood.
A bond is a securitised loan. Securitisation is a process that enables the bond (dresses it up) to be bought and sold easily in an open electronic securities exchange, in a similar manner in which public company stocks are traded.
The bond securitisation structure is a sharp distinctive difference when compared to a situation where you, as an individual, loan money to your brother-in-law (BIL). Your loan agreement, even in legal form, is a contract only between the two of you, probably unsecured and reliant upon a promise to repay in good faith.
You hope that your BIL still has good credit and the discipline to perform on your informal agreement. However, if you, the lender, needed your cash back in a hurry, you cannot sell the loan on to someone else. Possibly assign to another, but that is another topic entirely. And, if BIL defaults on the loan payments, you could be in dire cash straits yourself.
Bonds – are a broad description of all debt, but the names are different depending upon the life of the bond: short term are bills, medium term to ten years are notes and longer 20-30 and beyond are labelled as bonds.
Bonds are used for investing, savings, protection/ safety, portfolio diversification, cashflow management, lowering investment volatility with the caveat of good credit rating – high yield emerging market bonds may not be the best to preserve volatility in a conservative portfolio.
Bond presences in global markets are more than five times larger than stock markets. They generally:
• Come with a stated rate of interest (coupon rate),
• A principal amount to purchase (and to be repaid),
• A certain maturity date often considered a shelf life,
• A credit-quality designation – the higher the credit rating, generally, the more sought-after bond for cash preservation,
• High-grade (credit-quality) bonds tend to have the lowest rate of interest because of their perceived safety factor,
• A cheaper, faster method of raising cash for a company,
• Are used by central banks and the US Federal Reserve to control monetary funds’ flows within an economy,
• Are an easy way to store cash – when using high-grade, very short-term government bonds,
• Provide diversification for management of investments and related items.
The bond safety factor is quite simple and can be answered in two questions. Which interest rate is the best, and which bond is the safest?
Try a simple comparison as at April 2022 (Statista) between a United States Treasury 10-year Notes with a yield of 2.77 per cent and a Argentine government-issued 10-year note with a salivating yield of 49.68 per cent, which will you choose?
You know the answer to the best choice when you ask yourself, will I get my money (principal) back? The safest bond, generally, has the lowest interest rate.
And yes, there is a difference between yield and coupon interest rate – more on this in another article.
Governments love bonds.
When the US Federal Reserve talks about quantitative easing (QE), they accomplish that policy task of putting cash in the money flow system by buying US treasury bonds from individual and institutional investors on the open market.
Our Bermuda government does the opposite, procuring cash by selling millions of dollars of bonds primarily to foreign investors, thereby incurring debt liabilities composed of both principal and interest repayments. This strategy also increases cash into local circulation, but at a price.
This is your challenge, dear reader, to understand bonds used in everyday economies.
This is financial literacy at work!
Because indirectly, you, as a Bermuda taxpayer, are secondarily (some might argue, primarily) responsible for paying the annual interest cost (and the eventual principal at maturity date of the bonds) on all of our Bermuda Government sovereign debt.
Government fixed-income securities on the BSX, https://tinyurl.com/2pvc6xkw
Yield on 10-year government bonds in the largest economies worldwide as of April 2022, by country, https://www.statista.com/statistics/1211855/ten-year-government-bond-yield-country/
• Martha Harris Myron is a native Bermudian, author of the Bermuda Islander Blog – Illuminating All Things Financial Bermuda and The Dawn of New Beginnings: Bermuda’s First Financial Literacy Primer. Contact firstname.lastname@example.org