CIG buys bonds with loan to manage interest rates

| 16/06/2022 | 69 Comments
Cayman News Service
Finance Minister Chris Saunders (file photo)

(CNS): Finance Minister Chris Saunders has announced a decision by the Cayman Islands Government to draw out all of the remaining loan secured by the previous administration to invest in US bonds to manage the CIG’s borrowing for capital projects over the life of this budget. Saunders said that with the 3.25% fixed interest rate about to expire on the government’s $393 million line of credit and the expected increase in interest rates over the next six months, he made the decision to take all the cash.

In a statement released Thursday, Saunders explained that this move would ensure that the government could finance its capital projects over the next two years and avoid paying interest rates that could be as much as 6.75% by the end of this year.

In the face of expected financial constraints during the pandemic, the previous administration arranged a US$403 million line of credit facility in December 2020 with a consortium of local banks. However, despite the challenges, the government’s finance remained relatively stable, so the money wasn’t needed except for one $10 million drawdown to keep the credit line active. As a result, neither the previous nor the current administration has used the cash until now.

Saunders said a decision had been made to take the loan and simultaneously invest the proceeds in two-year US Treasury Notes to reduce interest costs on the borrowing that has been approved to fund upcoming capital projects through 2023.

“Utilising the existing local loan facility allows government to borrow at a fixed rate of 3.25% per annum for a 15-year duration,” Saunders said. “The prime rate in the Cayman Islands is currently 4% and is expected to increase in the remainder of 2022, following widely anticipated US Federal Reserve rate increases. Such increases would expose government to higher rates of interest in the future than the current 3.25% fixed rate offered by the consortium. Drawing the loan funds now will enable us to avoid being negatively affected by the expected upcoming interest rate hikes.”

With the clock ticking on the loan, Cabinet decided on 7 June to draw down the money before the favourable fixed deal on the interest rate expired on 18 June.

The US Federal Reserve is expected to meet over the next five months to direct more interest rate hikes following yesterday’s 0.75% increase. “Those interest rate hikes could translate in government being faced with a borrowing rate of up to 6.75% p.a.,” the minister said, noting the urgency to use the existing loan facility.

“The existing long-term facility of US$403 million offered by the local consortium at 3.25% p.a. is cheaper than the existing prime rate of 4% and is sure to be better than any potential future offer the government could garner from attempting to negotiate a new arrangement under the current volatile interest rate environment,” Saunders said.

He noted that no penalties are levied if the government repays the loan early. “An earlier than planned repayment of the facility is a means of reducing interest expense that government would otherwise face and it currently has approval from Parliament to borrow almost CI$350 million across 2022 and 2023 for its capital projects, such as the mental health facility, the schools and the waste-to-energy plant.”

Saunders said the loan funds drawdown would not be used to fund the government’s day-to-day operating expenses, only the infrastructure projects. Operating expenses are covered by revenues, he noted. With the money in bonds until it is needed, the CIG will save on borrowing costs since the money will earn almost as much as the interest that is being paid on the loan.

“As at 16 June, a 2-year US Government Treasury Note had a yield of approximately 3.2%, which will substantially reduce the carrying cost to government of the loan funds drawn down.”

He said four local banks had expressed an interest in acting as brokers on behalf of the government in purchasing the US Treasury Notes, and CIBC FirstCaribbean International Bank was the successful entity.

“In our efforts to ensure stable, effective and accountable government, this course of action is the most prudent and responsible one to take with regard to borrowing in the current market conditions,” Saunders said. “With the interest rate capped at 3.25% over 15 years, and by investing the borrowed funds until they are required, we can reduce the cost of borrowing while also funding needed capital projects to expand our Islands’ infrastructure. It’s a clear win for the Cayman Islands in a volatile time globally and maintains the ongoing stability of our public finances.”

He said the government would not be engaging in any further borrowing for the remainder of this term, and as of 31 May, government debt stood at CI$206.4 million. The drawdown will increase the balance to CI$535.5 million, making a debt-to-GDP ratio of about 9.9% one of the lowest in the world.

“This increased cash-in-hand will enhance the country’s ability to respond to any emergency that might arise in these challenging times,” he said. “The government has considered this decision very carefully and has concluded that it is in the islands’ best interest that loan funds be drawn now in June 2022 ahead of a rapidly increasing interest rate environment anticipated for the near-term.”

If the government had to negotiate a new facility in the future, he said, there was no doubt that it would be costlier for the country.


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Category: Government Finance, Politics

Comments (69)

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  1. Anonymous says:

    What’s the current CIG monthly payroll?

    $25-30,000,000

  2. Anonymous says:

    Wish I could get a $300mln “free money” interest rate arb over 15 years, but that trade only works if you are smart enough to exploit that market yield spread. Borrowing at 3.5% to buy US 2yrs at 3.2% is a 30bpts losing trade on $300mln per year. This adds $900,000 in stupid cost per year. Even worse if we borrow again against that collateral and not factor repayment.

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    • Mumbichi says:

      Soooo, they refinanced the country for a less favourable rate, but less than the huge hit they would likely take if they did nothing.

      I understand. It’s damage control. I guess I’m glad they didn’t get a reverse mortgage. ;o)

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      • Anonymous says:

        Nope. They could have simply not drawn down.

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      • Anonymous says:

        Refinance would be where they used the money to pay down more expensive debt. This is taking our more debt to spend it – the cost of borrowing may be low but is additive to the existing debt burden. Not damage control bay at all – they could have just let the line expire rather than draw it all down.

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      • Anonymous says:

        Where’s the refinancing? They are adding debt, yes and a cash pile, which will be spent and the debt will still be there.

        They could always exercise fiscal prudence and better manage record revenues and surpluses………

    • Tom McCallum says:

      Perhaps flip this to consider it as investment capital in (for example) green infrastructure projects to benefit Cayman and Caymanians for the long term.

      If you offered me equity capital at 3.25% that I could lay off in the short term at a cost of 20bps max I’d bite your hand off for it

      (and yes, I have decades of direct experience in investing in and building businesses in Cayman and internationally, but any layman can see that this is a great deal)_

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  3. Anonymous says:

    They should use it to fund their pension scheme.

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  4. Anonymous says:

    Nice, now let’s get those cruise piers built!

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  5. Anonymous says:

    Brilliant idea, impressed by the CIG for coming up with this. Not as dumb as I thought they were.

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    • Anonymous says:

      World Class. But you all knew it all along.

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    • Anonymous says:

      He forgot to thank the PPM for having gifted Cayman with this facility.
      It was intended to see us through the uncertainties of the Covid downturns, but will now be used for vote buying giveaways.
      .

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    • Anonymous says:

      Debt is debt and must be repaid at some point. This article speaks about the scheme to limit interest expense. No mention of the fact that we did not need to borrow $300+ million in the first place. CIG revenues have never been stronger and will continue to climb due to inflation on the value of goods imported. PACT is throwing money around in an attempt to secure their political futures.

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      • Anonymous says:

        Debt isn’t ideal but we can’t be sure revenues will continue to climb.

        I’m no fan of this government but it’s hard to argue against this move.

        It would be foolish to waste this opportunity to borrow below market rates.

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        • Anonymous says:

          It took the leader of the opposition having to go in radio cayman and remind them the facility was expiring at the end of June for this little announcement to finally happen. Saunders asleep at the wheel again

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        • Anonymous says:

          @10:53 you’re correct, “we can’t be sure that revenue will continue to climb.” We can however be sure, that this government will continue to recklessly waste the country’s money, by handing out $ to anyone who can sign their name or place an X on a application.

          We should all be concerned what will happen, when the good revenge times end and this socialist state monster they have created and continue to feed, shows its ugly head. Indeed borrowing might not be an option and income tax would be their next great idea to “finance” government needs. SMH

      • Tom McCallum says:

        I ask you to give the benefit of positive thinking for a moment. Think of this as investment capital to invest in assets for the benefit of Cayman and Caymanians.

        Many don’t seem yet to have grasped the magnitude of the recent policy announcement by the Premier that a majority stake in future renewables investment will be held by the state.

        This is not fronting as has happened so often in Cayman, this will be what I used to call “reverse fronting” when I led investments in businesses for a Caymanian group holding company. Business people with solid ideas and businesses got to hear that we had capital and access to capital and we would put that up for our 60% Caymanian ownership. They would bring management expertise plus their own capital and we would partner.

        I am hoping CIG does the same, bringing in private sector expertise (of qualified and experienced Caymanians, we now have plenty of them) to help lead a Cayman Investment Fund focussed on green growth.

        The future is green, and by investing in that future on behalf of all Cayman, this goes a long way to answer the age old “who are we building for ?” question around the cayman economy.

        I do hope this $300m is used for such careful long term investments. If so, a cost of equity capital investment of 3.25% with a carry cost of only around 10bps is an amazing deal indeed!

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      • Tom McCallum says:

        Debt is debt except when it is investment capital.

        Am sure you have heard of Private Equity?

        In the low-interest environment of the last 12+ years since the GFC, Private Equity has boomed. It isn’t rocket science, simply raise low cost capital to buy businesses with a combination of debt and equity, then grow the investment value.

        If Cayman treats this as an investment fund, it is a great deal to have it at 3.25%, it makes them investor of choice for (say) new renewable energy projects.

        If instead it is kept for projects that do not generate revenue (eg public infrastructure), then yes, it is government debt, but 3.25% is still a historically very low rate

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  6. Anonymous says:

    Ok. But why is everyone avoiding the Education issues that were brought up in Parliament?
    Kids have missed learning, no catch up programme, and now sitting exams to their disadvantage.
    No one is speaking for them!

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  7. Anonymous says:

    Bit of a mistake on this. Government could have bought a 3.35% GIC and made money vs buying the US Tnote.

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  8. BLVCKLISTED says:

    “…it currently has approval from Parliament to borrow almost CI$350 million across 2022 and 2023 for its capital projects, such as the mental health facility, the schools and the waste-to-energy plant.”

    …..sigh.

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  9. Anony says:

    Providing the treasury prices do not collapse during the upcoming recession.

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    • Anonymous says:

      A recession usually has the opposite effect on bonds. The risk here is that the fed hikes rates more than expected and the bonds will fall.

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  10. Anonymous says:

    beats having to make hard decisions regarding cutting cig over expenditure…..the trough just got alot bigger for the civil service.

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  11. Renewable energy says:

    Excellent news, now we must invest in renewable energy solutions, like floating solar farms and wind turbines at sea so we can wean Cayman off of expensive and polluting fossil fuels. The time is now.

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    • Anonymous says:

      Those floating farms would need to be certified and insurable, cat 5 hurricane-proof for that to be a responsible investment.

  12. Tom McCallum says:

    This is very savvy. Credit to the prior government for securing the facility at a time of low rates and for the current government for locking it in for the 15 years.

    Also to note that current 2 year treasury note yields are already at 3.15% yield and will soon go higher than the 3.25% loan coupon rate.

    In other words the government will actually make money on this loan until they invest it in infrastructure (such as renewable energy investments) for the benefit of the country. To be able to make those investments at a cost of capital of 3.25% is quite fantastic.

    I only wish they’d gone out and raised $1bn a year earlier when rates were under 2% (as I and Marla Dukharan recommended). The foresight on this was easy, the bravery to act sometimes less so.

    Anyway, Cayman now has these funds to hand to invest carefully into areas that will benefit our people for the long term.

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    • Anonymous says:

      How it will be invested is the big question! I hope they do not squander it on capital projects that do not result in benefits for future generations and I hope the projects are properly researched and managed ! We cannot afford to be complacent

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      • Tom McCallum says:

        Agreed

        I do hope too that this can be ring fenced to be the beginning of a Cayman Investment Fun led that leads state investment in renewables and green infrastructure investment as per the major policy announcement recently by the Premier.

        At this very low cost of equity capital Cayman itself becomes the preferred investment partner for companies wishing to invest in Caymans green future.

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    • Anonymous says:

      All sounds good except this is not the Government to be trusted with hundreds of millions of dollars! I can already hear the schemes to scrape some off the top hatching. God help us

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      • Anonymous says:

        I’m sorry, but previous governments were guilty of this. Right now, can only hope for better with this one. Time will tell.

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    • Anonymous says:

      If only the funds would be managed properly. Small island corruption is the risk here. Think BVI and the others.

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  13. Anonymous says:

    Breakdown of how this will be spent please? We have zero clarity on this.

    Half a billion of debt heading into a recession?

    A few months ago you told us that a 1.625% interest rate was a credible indicator of market conditions and that 3.25 was high. You have zero credibility.

    Dangerous person to be holding and controlling our money.

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    • Tom McCallum says:

      A few months ago that rate likely was a good indicator, but the market has changed. Rates re higher and going higher still. Wry difficult to credibly argue that locking in at 3.25% is anything other than good financial management. Oh, and remember they had a hedge in place.

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  14. Concerned Caymanian says:

    When will the Covid Restrictions be lifted? Let us first bring back Cayman to normalcy, so that residents, Caymanians and tourists can travel at free will. Remember that you have a big concert coming up in mid July, some of these artists have their followers who are vaccinated and unvaccinated. People dont want to quarantine , of which now has no bearings. Try to prioritize this now. Cayman needs back their tourists, what’s Cayman loss will be other Caribbean gain. Nothing officially has been said, we are all in limbo. Dont live to regret your actions. Wake up Cayman, covid is here to stay. Let us follow guidelines not restrictions please.

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  15. Brian Tomlinson says:

    Smart move.

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  16. Michael Day says:

    Makes sense. Credit where it’s due.

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  17. Anonymous says:

    tax, spend, borrow…the pact plan.

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  18. Anonymous says:

    Six of one, half dozen of the other! Popcorn not necessary.

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  19. Anonymous says:

    He really wanted those bonds. Lazy thinking by our goverment.

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  20. Anonymous says:

    Jamaica here we come.

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  21. Anonymous says:

    My God. Joined up thinking! From OUR government! How refreshing. I am actually impressed. Thank you!!!

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  22. Orrie Merren says:

    Fiscally prudent move on the part of CIG, which Hon. Deputy Premier Saunders has announced, to fund infrastructure projects, especially in the current environment where interest rates are rising.

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    • Anonymous says:

      What’s prudent about it? He’s literally betting that US rates don’t rise higher than expected and the value of the bonds he’s buying doesn’t collapse.

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      • Anonymous says:

        2 years it says maybe staggered maturities, …sounds fine to me…

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      • Anonymous says:

        If they are buying 2 year US Treasuries it doesn’t matter where rates go if they aren’t going to sell them before maturity. They will earn 3.2% on them and pay the banks 3.25% for the money, once the Tbills mature they will have cash at a fixed rate for 13 years of 3.25%. Whether they will need that money in 2 years is pretty hard to gauge.

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        • Anonymous says:

          Obviously if they keep to maturity but it says “the funds will be invested [implication being in 2y notes] until required. In other words they will sell when needed not run to maturity in which case they are taking price risk.

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    • Anonymous says:

      When did borrowing vast amounts to fund questionable capital expenditure whilst giving away record tax receipts become prudent? Maybe ask Gordon Brown how that worked out in the UK.

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  23. Anonymous says:

    I thought the Government was running a surplus with record revenues?

    So unless they are going to pay down other debt that is becoming more expensive, why do it….?

    “Where’s that firehose?!”

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    • Anonymous says:

      Because they make a spread on the fixed rate offered by the local banks vs. the return on the fed rate. Only losers are the local banks that didn’t see the rising rate environment. Well played CIG. Wish I’d done the same.

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      • Anonymous says:

        It’s a negative spread – paying the banks 3.25% for money they are earning 3.2% on. If you are so keen to do deals like that I will happily pay you $320 for every $325 you give me.

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    • Arty says:

      Ramping up debt for vote buying.

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    • James says:

      Exactly, we have no idea how this will be spent. They have spoken about paying down debt, capital projects and for an emergency. If increasing our debt to over half a billion you would think they would tell us what they would spend it on? This may be spent closer to the election on socialist projects to help re-election.

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      • Anonymous says:

        Things such as the Mental Health Facility, the schools and the waste-to-energy plant are stated projects, but, perhaps, not everything. Read the article.

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    • Anonymous says:

      Wonderful news, we can now get some more stipend programs going just in time for election season!

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    • Anonymous says:

      Surplus? We spent that already bo-bo!

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