January 25, 2022

Cayman: Opposition urges Government to change course over proposed US$400M 30-year Bond

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Hon Roy McTaggart

On behalf of the Members of the Opposition I want to express our concern with the announcement that the PACT Government is considering issuing a US$400M 30-year bond. Our concerns include:

  • the rushed and unexpected nature of the announcement, particularly as no mention of this was made at the recently concluded Budget and Finance Committee meetings of Parliament.
  • previous experience with a US$312 million 10-year Bullet Bond arranged by the UDP Government in 2009. This bond cost the country dearly in set-up fees and interest and this proposed Bond will cost us far more than that.  
  • this proposed bond issue, together with other planned borrowing by this government, will undo the hard work of the previous two administrations and substantially increase the country’s debt and undermine the government’s current excellent financial position. 
  • such a bond is unnecessary and will become a significant financial burden to the people of these islands over the next three decades. This ultimately means less money available to assist families and businesses over the medium and long term, especially as we recover from the pandemic in what is still an uncertain economy.

What has changed, and what’s the rush?

The initial announcement on the Government’s Bonfire procurement website stated that the government was considering the possibility of a US$400 million thirty year Bond Issue and was seeking invitations for “suitably qualified Independent Financial Advisors to submit a proposal, along with their experience, to serve as a Bond Issue Financial Advisor for the potential bond issuance process”.  

The announcement states that interested Financial Advisors should submit the requested proposal by January 14th, 2022. In addition, the indication was that the transaction closing would be completed between February 1st, 2022, and May 31st, 2022. 

A week later, a clarification was issued on the Bonfire website stating that the notice of a potential US$400M bond issue in 2022 was a request for information only and not a procurement exercise. 

This all seems rather rushed and has not started very well at all. One would have expected that if the government was considering a bond issue over 30 years, this would have been mentioned at the recent meeting of the Finance Committee and during the budget presentation by the Minister of Finance. Any such facility will need to be approved by the Finance Committee and should have been considered then. The fact that it was not said is concerning enough, but it begs the question of what has changed since the last meeting of Parliament?  

We should not forget the lessons learned from the 2009 bullet bond:

The country’s experience with the US$312M 10-year Bullet Bond arranged by the UDP Government in 2009 became a cause of concern about how the bond would be repaid. The UK advised the then government to create a sinking fund to ensure money could be there to pay it. The government ignored that advice.  

Not only did the Bond Issue cost substantial public funds to put in place, but for every year of the ten years the debt was outstanding government paid interest on the total $312 million. By our estimates the interest payments on that bond amounted to more than $180 million.  By contrast a standard 10-year amortised loan would have had interest payments of just over $100 million, a savings of about $80 million. 

By early 2013, a member of the Interim Government, led by then Premier Juliana O’Connor-Connolly, expressed the view that the country would not likely be able to repay the bullet bond in 2019 and suggested that the government may need to sell assets to repay the debt.   

That was not our approach when we formed government in 2013 — rather than have a fire sale of government assets the Progressives led Governments of 2013 to 2017 and 2017 to 2021 re-established and maintained fiscal discipline to Government finances.   We achieved substantial year-on-year budget surpluses, introduced no new taxes or fees on families or businesses, and reduced existing ‘tax burdens’ where possible. And we worked to substantially rebuild our reserves and put in place a plan to greatly reduce Government debt, including the repayment of a significant portion of the bullet bond. The remaining amount was converted to a standard amortised loan with excellent repayment terms

The government is continuing to ignore prudent financial principles.

The government has seemingly turned its back on the prudent financial principles that brought stability to government finances, underpinned our consistent economic growth, and created the headroom that allowed the country to chart a steady and safe course through the initial stages of the pandemic. It is a disregard for the long-term financial interests of the Cayman Islands.

The contrast with our Progressives strategy is obvious. Over the two Progressives-led Governments, the national debt fell from around $560m in 2013 to under $250m on the day we left office. A reduction of over $300m or above 55% in Cayman’s national debt. No other Government in the history of Cayman has achieved this. The PACT government seems set to undo in two years what it took us eight years to fix – leaving the country again with massive debt. 

This bond will saddle us with interest payments on $400M for the next 30 years and by my estimates, conservatively assuming interest rates of between 4% to 5%, will cost the country between $480 million to $600 million dollars in interest over the life of the bond. Far more than the amount being borrowed. 

I will close by cautioning again that if the government goes forward with this 30-year bond, it will leave the country, and future governments, with the burden of repaying almost one billion dollars in interest and debt through to the year 2052; if it actually is repaid by then. Such a bond is unnecessary and should not proceed.   Indeed, I sincerely hope that the government carefully reconsiders the present course of choosing increased debt.  It should instead seek to use existing revenues to pay its way and invest for the future rather than hindering future generations of Caymanians, our children and grandchildren,  with the millstone of enormous growing debt.

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