Credibility Deficit

There's few things less interesting than discussion on interest rates, but the Finance Minister let fly a shockingly disingenuous howler in defence of her $500M bond placement:

If we look the Opposition's record of long term borrowing when the United Bermuda Party was in government, we find that the coupon or interest rate was higher than what Government achieved on the recent bond. For example, in 1994, the United Bermuda Party Government attracted a rate of 7.59% on a senior debt issue. A Progressive Labour Party government refinanced that facility at a lower rate of 5.39% in 2004.

Another example, in 1997, the United Bermuda Party government attracted a rate of 6.72% on an issue with a ten year maturity. You will note that both issues were single bullet maturities and not staggered as the Opposition said should have been done with the recent issue. In any event, that ten year facility was refinanced at 5.73% in 2007.

The simple truth is that no administration in Bermuda has been able to obtain a long term interest rate on debt instruments below 5%.

The Finance Minister is smarter than this, so we can only chalk this up to desperation.

The claim is that the PLP achieved better deals than the UBP's (much smaller) long term debt by refinancing in 2004 and 2007 and the bond placement in 2010. It's slightly material to the discussion that this claim is made in a complete vacuum, with no mention whatsoever of the interest rate environment at the time.

A quick search would show that the 90s were a high interest rate period, about double that of 2004 and much, much higher than today. Citing 2007, where the Finance Minister professes some skill in refinancing at 1% lower than in 1997, simply reflects nothing more than the difference in the prime rate. No skill there. If that's all it takes to be Finance Minister then sign me up.

Hopefully Ms. Cox is aware that the comparison metric between interest rates is not the absolute number but the spread over treasuries. The UBP's debt, which the PLP refinanced, are both in line with the prime rate.

The rate the Finance Minister achieved in the just placed bond however was about 2.25% over prime (3.25%). That is what was achieved in an environment where the fed is lending at as low as they can go, pretty much zero.

So a high school level analysis reveals that the examples the Finance Minister cites in isolation as examples of her outperforming the UBP were nothing of the sort, and the placement just completed is paying a higher premium over prime. The exact opposite conclusion she wants us to draw.

Reading the article from HSBC Bermuda CEO Phil Butterfield you can just picture him rubbing his hands together at all the long term debt placements he sees on the horizon that will generate some chunky fees for his firm (which is who his responsibility is to):

Mr. Butterfield said the success of the sale was significant for Bermuda, which would now be known among major investors on the capital markets. "This positions us well, as a jurisdiction, to potentially go back to this same group of investors in the future," Mr. Butterfield said.

"That is significant, when you think about the infrastructure challenges we face, like the Causeway, the Airport and possibly the relocation of the docks, for example."

This is a bankers dream.

The suggestion that over-subscription is a vote of confidence in the island is absurd. This isn't a popularity contest, it's business. Investors saw a high interest rate and leaped at it.

Why the decision to up-size from $400M to $500M was made at the same offered rate is beyond me.

If you generated over $2B of interest at 5.6% for $400M, surely when it came to an additional $100M the prudent course would have been to make this smaller offering at a lower rate. Why go out at the same level?

It would appear, that with all the back and forth about how well the placement was managed, that at the end of the day we were looked at as just another Caribbean bond. In fact the placement is pretty much identical to the terms of the Cayman Island's recent offering.

Bear in mind though that Caymans were unable to make payroll a few months ago. We were seen as the same risk as that.

As a finance type friend told me yesterday:

If she is even thinking of comparing today's bond rate to 1994 she is seriously on crack as rates in 2010 are even lower still.

No getting away from the fact that our recent bond was issued at a spread to
Treasuries attributed to crap sovereign credits and NOT AA.

And finally, I couldn't help but chuckle at the idea that going to the debt markets was somehow a prestige event for the island. I'm thinking it's more prestigious to not have to borrow in order to meet your obligations.

But what's done is done.

The conversation going forward now has to be about a) living within our means and prioritising what we can and cannot afford, and b) setting about saving $500M over the next ten years and $28M per year in interest to service the facility. It would be nice to pay that down early and save all that interest.

Shame the Government blew almost a $100M on Berkeley and the cruise ship terminal isn't it?

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