Debt refinancing: Bermuda government repurchases senior notes with principal value over $750 million
On Wednesday this week, in a mind-numbing 26-page reading challenge, the Bermuda government announced an offer (tender) to repurchase (repurchase) two of its senior note issues for cash from investors holding registered bonds.
The proposed senior notes are listed on the Bermuda Stock Exchange under Listed Issuers Fixed Income:
• The first outstanding principal balance of $353,905,000, interest at 4.138%, due date January 3, 2023, with a hypothetical purchase price of $1,005.44 per unit above par
• The second principal outstanding balance of $402,203,000, interest at 4.854%, due date February 6, 2024, with a hypothetical purchase price of $1,024.64 per unit above par
• Plus accrued interest due on each until the exercise date of July 12, 2022.
The government also issued the attached statement:
“The Government will determine in its sole discretion the aggregate principal amount of the existing Notes of each series validly tendered pursuant to the terms and conditions which it will accept for purchase. The Tender Offers are not conditional upon a minimum participation of holders of any series of Existing Obligations but are subject to:
“(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 bonds (the “New Bonds”) by the Government (the “New Bonds Offering”), which is intended to be settled before or at the same time as the Tender Offers, and
“(c) the dealer manager contract relating to the Public Offers not being terminated before or at the time of the settlement of the Public Offers.
Here is the key in plain language:
In order to redeem the old tickets, two “New Tickets Offers” must be launched.
It is specified that “Offers of New Bonds” will be solicited at the same time. Presumably some Investors may “transfer” an investment in an existing Note to a new Note.
What is unclear is whether the new note 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.
In short, the mechanics of a bond security is not easy to understand.
A bond is a securitized loan. Securitization is a process that allows the bond (the bond) to be bought and sold easily in an open electronic stock exchange, in the same way that shares of public companies are traded.
The structure of bond securitization is a stark difference from a situation where you, as an individual, lend 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 based on a promise to repay in good faith.
You hope your BIL still has good credit and the discipline to stick to your informal agreement. However, if you, the lender, need your money quickly, you cannot sell the loan to someone else. Maybe attribute to another, but that’s a whole other topic. And, if BIL does not repay the loan, you could find yourself in a difficult financial situation.
Bonds – are a broad description of all debt, but the names are different depending on the life of the bond: short-term bills are bonds, ten-year medium-term notes and longer-term bonds 20 to 30+ years are labeled as bonds.
Bonds are used for investment, savings, protection/security, portfolio diversification, cash flow management, reducing investment volatility with the caveat of a good credit rating – high-yield emerging market bonds may not be the best for preserving volatility in a conservative portfolio.
The presence of bonds in global markets is more than five times greater than that of stock markets. Generally, they:
• Come with a stated interest rate (coupon rate),
• A principal amount to buy (and repay),
• A certain maturity date often considered as a shelf life,
• A credit quality designation – the higher the credit rating, generally, the more desirable the bond is for cash preservation,
• High quality bonds (of credit quality) tend to have the lowest interest rate due to their perceived safety factor,
• A cheaper and faster method of raising funds for a business,
• Are used by central banks and the US Federal Reserve to control the flow of monetary funds within an economy,
• Are an easy way to store money – when using very short-term, high-quality government bonds,
• Provide diversification for investment management 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 in April 2022 (Statista) between a US 10-year Treasury note yielding 2.77% and an Argentinian government-issued 10-year note yielding a salivating 49.68%, which will you choose? -you ?
You know the answer to the best choice when you ask yourself, will I get my (principal) money back? The safest bond, in general, has the lowest interest rate.
And yes, there is a difference between yield and coupon interest rate – more on that in another article.
Governments love bonds.
When the US Federal Reserve talks about quantitative easing (QE), it is performing this political task of injecting liquidity into the money flow system by purchasing US Treasury bonds from individual and institutional investors on the open market.
Our Bermuda government is doing the opposite, raising cash by selling millions of dollars of bonds primarily to foreign investors, thereby incurring debt consisting of both principal and interest repayments. This strategy also increases liquidity in local circulation, but at a cost.
It is your challenge, dear reader, to understand the bonds used in everyday savings.
It’s financial literacy at work!
Because indirectly, you as a Bermuda taxpayer are secondarily (some might say, primarily) responsible for paying the annual interest (and any principal at the bond maturity date) on all of our debt Sovereign of the Government of Bermuda.
Fixed Income Government Securities on the BSX, https://tinyurl.com/2pvc6xkw
10-year government bond yield in the world’s largest economies in April 2022, by country, https://www.statista.com/statistics/1211855/ten-year-government-bond-yield-country/
• Martha Harris Myron is from Bermuda, author of the blog Bermuda Islander – Illuminating All Things Financial Bermuda and The Dawn of New Beginnings: Bermuda’s First Financial Literacy Primer. Contact [email protected]