With gross national debt at $2.185 billion and facing another year with a budget deficit, the Bermuda Government is to execute a $200 million loan facility agreement with Butterfield Bank.

Bob Richards, the Minister of Finance, made the announcement yesterday in the House of Assembly.

Six months ago he warned that it would be necessary for the Government to borrow $125 million to see it through the 2015-16 fiscal year.

The loan agreement with Butterfield Bank is in effect an overdraft facility for Government to use when necessary, with an interest rate of 4.75 per cent to be paid on any monies drawn down.

Mr Richards said there were a number of reasons behind the decision to make the two-year loan facility deal.

One reason was to access an interest rate lower than the 5.1 per cent average that Government is paying on its other borrowings. Mr Richards pointed out that there were lower costs associated with the arrangement compared with other forms of borrowings.

These included public bonds where fees can typically range from $500,000 to $2 million.

In 2013, the Government raised $750 million through overseas US dollar bond issues, and a further $50 million with a Bermuda dollar bond issue. That money was needed to see it through multiple years of projected budget deficits.

Mr Richards said other reasons for deciding to have a loan facility with the bank included the minimal reporting and minimal documentation requirements which will result in lower legal fees. There is also the market certainty, he added.

“There are no market timing issues and pricing uncertainty associated with this transaction. International deals will have this risk which can negatively impact the coupon rate and execution of the deal with no timing,” he told MPs.

Mr Richards said that flexible terms meant funds can be drawn as needed, saving on interest cost.

“It must be noted that at this time Government has not borrowed $200 million but only has a facility in place to borrow up to this amount,” he said.

“Funds will only be drawn when absolutely necessary. It is anticipated that this transaction should meet Government’s total financing requirements for fiscal year 2015-16 and a portion of the 2016-17 deficit.”

If the $200 million loan is fully used Bermuda’s gross debt will stand at $2.385 billion.

“This level of debt for an economy the size of Bermuda is not only unsustainable, but also, as mentioned in the Budget statement, is the biggest risk to Bermuda’s financial independence and the welfare of all sectors and all people in this Island,” said Mr Richards.

“Therefore it is critically important that Government continues to aggressively reduce the deficit and start paying down on our debt.”

It is not the first time Butterfield Bank has extended a $200 million loan facility to the Government. A similar deal was struck by the previous Progressive Labour Party administration in 2011 as part of its debt financing strategy.

Mr Richards said the Government had been considering various financing strategies since April, and following a RFP (Request for Proposal) process had executed the two-year term loan facility with the bank.

“This facility offers the Government valuable flexibility with regard to its debt management strategy. Also satisfying is the fact that a local financial institution was able to provide Government with its financing needs for the year demonstrating the strength of the local financial sector,” Mr Richards told MPs.

He said the loan matures in 2017 and Government has the option to either refinance this debt, or it can be paid off using the Sinking Fund. The decision taken will be dependent on prevailing market conditions at the time and the balance in the Sinking Fund.

“The raising of this $200 million loan facility has helped the Government to enhance its financing flexibility and keeps this capital here on the Island,” said Mr Richards.

“Moving forward the Government will seek to further expand the domestic capital markets which could provide many benefits to the Bermuda economy.”