Government Loans Amendment - Debt Ceiling Increase

Mr. Speaker, I rise this morning to inform this Honourable House of the status of Government borrowing and the requirement to increase the authorized debt ceiling. The Government of Bermuda’s borrowing activity is conducted in accordance with the requirements of the Government Loans Act 1978 which sets a legal limit on loan and loan guarantees. Accordingly, later this morning, I will table an  amendment to the Government Loans Act 1978 to increase the debt ceiling by $600 million to $3.5 billion.

Mr. Speaker, when this Government took office in July 2017, net debt stood at $2.397 billion and the debt ceiling at $2.5 billion. We came  in with a focus on prudently managing the country’s finances on behalf of the people of Bermuda and committed ourselves to a strategy of not increasing the debt ceiling. We were successful in

honouring that commitment in the 2017/18 and 2018/19 fiscal years and were on track to do so again in fiscal 2019/20.

Unfortunately, Mr. Speaker, in July 2019, in anticipation of borrowings to fund the purchase of indebtedness related to the guarantees associated with the stalled Caroline Bay project, the debt ceiling was increased by $250 million to $2.75 billion. Government subsequently entered into a $200 million short-term credit facility with local financial institutions to: (i) purchase the project’s Tranche B and Tranche C loans, (ii) acquire the claims of the project’s general contractor and local subcontractors, (iii) fund expenses associated with  implementing a remediation plan to protect the physical assets on the site and (iv) fund expenses associated with professional advisers.

Mr. Speaker, at the end of March 2020, net debt stood at $2.68 billion, an increase of approximately $280.0 million over the July 2017 balance. Mr. Speaker, it is important to put this increase in additional indebtedness into its proper context and set out for Honourable Members the primary components of this increase:

• Approximately $187.0 million related to payment of obligations under the Caroline Bay project guarantees and related costs;
• $64.2 million related to the funding the 2018/19 Sinking Fund contribution; and
• the remainder to finance capital expenditures in fiscal years 2017/18, 2018/19 and 2019/20.

Mr. Speaker, I provide this information for context to illustrate that, prior to the COVID-19 pandemic, we were executing on our plan to reduce fiscal deficits, generate budget surpluses and paydown debt while at the same time delivering important public services and a secure, sustainable future for all citizens of Bermuda.

Mr. Speaker, in April 2020, in anticipation of the negative impacts of the COVID-19 pandemic, the Government raised the debt ceiling a further $150 million to $2.9 billion to ensure that it had the necessary liquidity to fund a variety of public health and emergency financial measures to support Bermuda’s people and economy. In May 2020, the Government entered into a $150 million credit facility with local financial institutions. To date, approximately $80 million of this facility has been drawn to fund emergency measures associated with COVID-19.

international capital markets. The gross proceeds to be raised will depend on market conditions but may be in the range of $1.0 - $1.25 billion.

Mr. Speaker, the proceeds from the sale of the contemplated bond issuance are intended to be used to, among other things, (i) finance the anticipated deficits for fiscal years 2020/21; 2021/22 and 2022/23;

(ii)  refinance  the  credit  facility  associated  with  the  Caroline  Bay

project; (iii) refinance the credit facilities associated with general liquidity needs and the COVID-19 Emergency measures; and (iv) depending on market conditions liability manage tranches of existing indebtedness.

Mr. Speaker, any funds borrowed that are not required in the current fiscal year or for liability management purposes are to be invested in the Sinking Fund.

Mr. Speaker, the proposed amendment will provide for the authority of the Government to borrow up to the newly established limit as we navigate our way through the COVID-19 pandemic and beyond. The proposed statutory debt ceiling of $3.5 billion is set at a level to enable funding of the Government and its economic recovery over the next 2-3 years.

Mr. Speaker, in closing Government remains committed to prudent and sensible borrowing, this borrowing strategy will allow the Government to lock-in historically low rates, potentially reduce our interest expense on some of our current bonds and take advantage of strong current global demand for investment grade assets.

Thank you, Mr. Speaker.