Opposition: US$400 million government bond issue unnecessary, expensive

The Opposition has urged government to change tack over news that it is considering issuing a US$400 million 30-year bullet bond.

On its procurement portal, government on 30 Dec. asked independent financial advisors to submit bids to serve as consultants in the bond-issuance process.

Government said the purpose of the potential bond issue, considered for the second quarter of 2021, would be to fund general financing needs and potentially refinance existing debt, which is currently held in the form of loans from local banks.

This notice was changed on 6 Jan. and clarified to be a mere request for information by the ministry of finance based upon which no contracts would be awarded.

In a statement, the Leader of the Opposition said he was concerned because the “rushed and unexpected” move had not been mentioned at all during the budget debate and in the Finance Committee meetings of Parliament last month.

He argued the bond issue would be expensive and undo the work of previous governments in stabilising government’s finances and bringing debt levels down.

The previous experience with a US$312 million 10-year bullet bond arranged by the UDP government in 2009 had “cost the country dearly in set-up fees and interest”, McTaggart said.

“[T]his proposed bond will cost us far more than that” and “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”.

The bond issue was also unnecessary and would become a significant financial burden for the people of the Cayman Islands in the next three decades, he added.

“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.”

During the presentation of its 2022/23 budget, government said it would borrow to finance capital expenditure projects, such as investments in infrastructure, but government’s ongoing costs would be funded by revenue.

In total, government said new borrowing would not exceed CI$299.1 million in 2022 and CI$50 million in 2023. Government’s total debt is expected to increase from $232.1 million last year to $485 million this year.

In its initial notice, government said it would seek to have the bond underwritten by a financial institution and benchmarked against the 30-Year US Treasury.

The Leader of the Opposition said this notice and the changes that followed seemed rather rushed.

Given that Parliament’s Finance Committee would have to approve a bond issue, McTaggart said, it should have been discussed at the last meeting in December.

“The fact that it was not [mentioned] is concerning enough, but it begs the question of what has changed since the last meeting of Parliament?”

The Opposition estimated that interest payments on a previously issued US$312 million 10-year bullet bond had cost the public purse more than US$180 million in interest, whereas the interest cost of a comparable bank loan of the same size would have been US$80 million less.

McTaggart said the previous Progressives-led government repaid a portion of the bullet bond and in 2019 converted the remainder to a standard amortised loan with better repayment terms.

In his statement, the former finance minister claimed the government was turning its back on prudent financial principles and the long-term financial interests of the Cayman Islands.

While the previous government had cut the national debt by more than half from $560 million to $250 million, he said, “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.”

Assuming an interest rate of between 4% and 5%, the opposition calculated that a US$400 million bond would cost the government between US$480 million and US$600 million in interest over the life of the bond, exceeding the principal amount borrowed.

“Such a bond is unnecessary and should not proceed,” McTaggart said.