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It was decided last week that the Government would be able to borrow nearly £800m to fund the new hospital at Overdale...But how does one go about securing such a vast loan? And who will lend Jersey the money?
Express endeavours to find out …
By the narrow margin of 26 votes to 22, politicians last week decided to support the Government’s funding plans for the new hospital.
The Government argues that borrowing the lion’s share of the project cost will allow the States of Jersey to take advantage of historically low interest rates and maintain existing reserves, which are expected to yield a higher return than the interest than would be paid on debt.
Assessing the risks of this strategy, the Government highlights the clear risk that investment returns on the £1bn Strategic Reserve – the island's 'rainy day' savings account from which the debt will be financed and repaid - are not realised so it won’t be able to repay the loan.
However, it argues that the reserve has grown by 7% per year over the last decade, while the Bank of England’s base interest rate has been below 1% since 2009 + the long-term nature of the bond gives it time to find alternative funding solutions.
After two days of debate, politicians supported this argument.
As any homeowner will know, borrowing money comes at a cost, but the Government argues it will be minimal.
Indeed, it goes as far to say that, if it secures a low fixed-interest rate – or 'coupon', in the terminology of bonds – and the investment performance of the Strategic Reserve is maintained, this growth will pay for the hospital – in essence, we will be getting a hospital “for free”.
Adjusting for inflation over the next 40 years at 2.6% per annum, the Government estimate that on a £756m loan, it will pay back £460m in interest but the projected investment return on £756m will be £1.4m.
Pictured: The £756m borrowed for the new hospital will be added to the Strategic Reserve but ring-fenced so it can be extracted easily.
In real terms, the debt repayment over 40 years will be £297m (£756m if £1 today is worth £1 in 2061) resulting in a net gain of £635m.
This equates to a £1.4m gain through debt funding, compared to if the Government wrote a cheque for £756m now, depleting its reserves by 75% in the process.
Critics argue that there are too many ‘what ifs’ in the Government’s plans. What if the world goes into a deep recession and the investment performance turns south? The Government say that, worst-case scenario, it retains the option to write that £756m cheque and ‘pay off the mortgage’ in a oner.
Having secured the Assembly’s support, the Government is now following a similar process to when it secured a £250m bond in 2014, which it gave to Andium to improve, maintain and expand the island’s social housing stock.
One of its first jobs – which it has already started – is to appoint a ‘bookrunner’, which is a firm which will act as the lead conduit between the Government and lenders.
The bookrunner creates a ‘roadshow’ on behalf of the Government, which tells Jersey’s story, the reason for debt issue, the island’s financial position and answers all the questions that would-be investors are likely to ask.
The main advantage of the bookrunner – who will be selected after an open competitive tender process – is that they know the key players who are likely to want to lend to Jersey.
These will principally be pension funds, investment managers and asset managers who are used to work with governments, housing authorities and other public bodies issuing long-term debt.
Pictured: Investors, the underwriter and the Government will agree a coupon rate.
The bookrunner will then hold the equivalent of a ‘auction’, inviting investors to bid for a slice of Jersey’s debt.
Interested parties are highly likely to be UK and European pension managers and fixed-income fund managers who value the long-term nature of the bond and security of repayment it offers.
The investors will say how much they want to buy and what coupon price they are willing to pay. It is entirely possible that the two £378m bonds that the Government want to issue will be oversubscribed.
If that is the case, everyone’s bids will be scaled back on a proportionate basis. As an example, if a government issued a £500m bond and it received bids totalling £1 billion, everyone’s bids would be scaled back on a 50% basis.
Even though each investor will propose a coupon rate, a fixed coupon is agreed for each bond. The £250m housing bond, for instance, has a coupon of 3.75% over its 40-year repayment period.
Although the roadshow – usually done virtually these days – might only take a few days, the process can take a few months, so it is likely the bonds won’t be agreed until next year.
Unsurprisingly, bankers and lawyers also play their part as advisers and managers for both the issuer and the underwriter. The Government stipulate that banks involved have to have a Jersey presence and a local law firm will act on their behalf.
These services are usually be paid for on a fixed-fee basis.
It isn’t known at this stage although the Government’s sums in its funding proposal to the States was based on a 2.5% coupon, which it says is a conservative assumption. In short, it thinks it can get a lower rate.
Recently, the Isle of Man successfully issued £400m-worth of bonds with a coupon of 1.625% over 30 years to fund “sustainable finance” projects, to help the government achieve its aim of achieving carbon neutrality by 2050.
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On top of the hospital and housing bonds, the Government also hopes to borrow up to £750m to refinance pension debt and pay off its up to £500m ‘revolving credit facility’ which it secured to pay for its Covid response.
However, one senior politician – External Relations Minister Ian Gorst – has already said that he will not support the Government on this, so there could be some interesting exchanges when this is debated as part of the next Government Plan in December.
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