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Government considering US$400 million bond issue

Updated: Apr 9

The Cayman Islands government is considering issuing a 30-year, US$400 million bullet bond in the US capital markets in the second quarter of this year, to raise funds and refinance existing debt.

In a notice released on government’s procurement website on 30 Dec. 2021, the Ministry of Finance said it is soliciting bids from independent financial advisors to serve as consultants in the bond-issuance process.

A bullet bond pays its entire principal value on the maturity date, rather than in a series of payments, and cannot be redeemed early by the issuer.

Government said it would seek to have the bond underwritten by a financial institution and benchmarked against the 30-Year US Treasury.

“The purpose of the bond issuance would be to provide for the general financing needs of the government and possible re-financing of existing public sector debt in the Cayman Islands,” the notice said.

In its two-year budget approved late last year, government projected that it would need to borrow to fund capital expenditure and infrastructure investments but not to pay for its day-to-day operations.

According to the budget, government’s new borrowings will not exceed CI$299.1 million in 2020 and CI$50 million in 2023. Government’s total debt is expected to rise from an estimated $232.1 million in 2021 to $485 million in 2022.

In its 2022-23 Plan and Estimates, government said it would review opportunities to reduce debt-financing costs through refinancing.

Last year government paid CI$11.9 million in interest and fees on its existing public sector debt. This is expected to rise to $14.9 million in 2022 and almost $17 million in 2023.

The Public Management and Finance Act requires government to keep its debt-servicing cost below 10% of core government’s revenue. For 2022 and 2023, government is forecasting debt-servicing ratios of 8.3%, up from 7.4% in 2020.

In addition, government said it intended to seek fixed-rate, amortising debt to know with certainty both the financing costs and when the debt principal is fully repaid.

Currently, all of government debt is in the form of various loans from local banks, most of it with a maturity of fewer than six years.

The fact that a bullet bond is not callable should interest rates change, exposes the issuer in principle to greater risk that interest rates will fall over the life of the bond, making it comparatively more expensive.

However, that risk is low given that 30-Year US Treasuries are currently paying investors a below-inflation 2% interest rate.

Two years ago, government paid off a 10-year bullet bond issued in 2009.

The ministry noted that Cayman continues to hold an Aa3 Stable rating issued by rating agency Moody’s. In April 2021, Moody’s assigned an Aa3 Stable rating with respect to any government-issued bond.

At the end of 2020, Cayman had an estimated gross domestic of approximately US$5.5 million and government’s debt-to-GDP ratio was approximately 4.7%.

Potential bidders for the consulting contract must have strong experience in providing advisory services for bond issuances, the ministry said.

They will be expected to manage the bond-financing process; negotiate key business points; arrange for a credit rating of the bullet bond; write requests for proposals for legal advisors and book runners; review and rate all bids received under a tender process; and support underwriters in presentations to prospective investors.

The transaction is planned for some time between 1 Feb. and 31 May.

IMS is one of the longest established company management firms in the Cayman Islands. IMS is licensed by the Cayman Islands Monetary Authority to provide independent directors, company management and incorporation, mutual fund administration, captive insurance and trust services. For more information about our services, please contact us.

Disclaimer: this publication does not constitute legal or professional advice and should not be relied on as such.

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