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Market timing assisted with debt refinancing

Debt refinancing: Curtis Dickinson, left, the finance minister, with David Burt, the Premier. Mr Dickinson said a new bond issuance was more than three times oversubscribed and represents the lowest bond spread achieved by the Bermuda Government (File photograph by Akil Simmons)

Timing played a part in the Bermuda Government achieving its lowest bond spread on new debt notes.

In addition, investors showed a strong appetite for Bermuda Government bonds, with the issuance of $650 million of new senior notes being more than three times oversubscribed. During the past two weeks, the Government has been refinancing a chunk of the $2.42 billion net national debt.

It repurchased $424 million of its existing senior notes, and simultaneously sold $650 million of new bonds, locking-in an interest rate of 4.75 per cent.

The Government is paying out that interest to investors who bought the bonds.

The investors will also have their principal capital returned when the bonds fall due in 2029.

From the Government’s perspective, the deal is favourable as it allowed it to repurchase older senior notes on which it had been paying out interest of 5.603 per cent and 4.854 per cent.

Bermuda’s market move also came as the US Treasury ten-year yield fell to 3.09 per cent, having been as high as 3.24 per cent a week earlier.

That resulted in a lower spread between the yield on Bermuda’s new bonds and the comparable US Treasury ten-year bond.

Investors look at that measurement to assess the level of risk on a bond and whether it represents a good deal.

The yield on the US Treasury ten-year bond has since dipped marginally lower.

Curtis Dickinson, the new finance minister, told MPs yesterday: “The transaction represents the lowest ever bond spread to date achieved by the Government of Bermuda in the public bond markets.”

He said it was a landmark transaction that had successfully reduced the average cost of the Government’s debt to the tune of just over $1 million a year.

The Government also locked in the 4.75 per cent interest rate on its new bonds in advance of an anticipated increase in rates by the US Federal Reserve next month.

By repurchasing all $224 million of its 5.603 per cent notes that had been due in 2020, the Government does not have any major bonds due until 2023, which Mr Dickinson said significantly improved Bermuda’s liquidity profile.

By repurchasing $200 million of its 4.854 per cent bonds, due in 2024, the Government lowered the size of that tranche of debt liability to $550 million.

The finance minister said the effect of that was to smooth out the entire debt maturity profile.

Mr Dickinson said the level of interests in the new bond issue represented a “true show of support for the Bermuda credit from top global accounts”.

He added the order book was 3.2-times oversubscribed, which was made up of “some of the world’s top, high-quality asset managers” and underpinned by US accounts, with support from UK and continental Europe accounts.

Money raised by the new debt issuance that was not used to repurchase the old bonds will go to cover the remaining budget deficit for the current fiscal year — Government has projected a $89.7 million shortfall — and refinancing a $135 million loan on the island, which was scheduled to mature next year.

To read the ministerial statement, click on the PDF under “Related Media”