Gov expect credit rating downgrade due to £750m hospital loan

Wednesday 01 September 2021

Borrowing £756m to pay for new hospital could lead to a downgrade in the island's credit rating – although the Government is confident that it won’t impact investor appetite in Jersey.

Answering questions from Scrutiny, Deputy Chief Minister Lyndon Farnham – who leads the ‘Our Hospital’ project – said that Jersey taking out its biggest ever loan could reduce the islands's long-term debt rating from AA- to A+.

This means the island would be considered by rating agency Standard and Poor’s “somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions”. However, Jersey’s capacity to meet its financial commitments would remain “strong”.

Jersey received its first credit rating of AA+ in 2014 so it could take out a £250m bond to pay for social housing. In 2016, this was downgraded to AA by Standard and Poor’s in 2016, with the agency citing Brexit and a greater international focus on low-tax regimes as the reason.

Its long-term rating is now AA- and, for the short-term, is A-1+ with a stable outlook, which puts it on a par with the UK and Guernsey. 

Pictured: Our Hospital political lead Senator Lyndon Farnham.

In her recently published ‘Debt Framework’, Treasury Minister Susie Pinel said that the island could take on more than £2bn of debt.

That number includes £756m for the new hospital, but also a further £450m to re-finance liabilities in the public sector employees, and teachers, pension schemes.

The report also said that the island would aim to maintain an investment grade rating of BBB- or above, but Senator Farnham’s recent response to Scrutiny is the first time that the impact of the hospital borrowing has been singled out.

He said: “The Treasury Department consider it would be prudent to assume and be ready to accept a downgrade to A+ should the debt quantum contemplated be issued, though a downgrading is far from certain given the significant value of retained reserves, if the hospital is funded through borrowing. 

“Our advisers have no concerns regarding investor appetite for further issuances of debt in the event of a downgrade.

“At A+, the Island would maintain its investment grade which is expected to continue to support confidence in the Island as a stable and fiscally prudent jurisdiction.”

The S&P rating has tangible significance in that it influences how cheaply the Government can access the international credit markets. Indirectly, the credit rating may also give indications to the perceived strength of the Island’s financial position and stability of the local economy.

The Deputy Chief Minister has also discounted selling public assets to fund the new hospital or issuing a local bond to island investors.

"Disposal of sites or divergence of assets have the potential to produce sizeable capital receipts," he said. "However, Government never takes disposals into account when looking at project costs. The timing and process of asset disposals can be quite different to the project build making it impossible to match income with expenditure timing needs.

"While the sites may be in current clinical use, they could be suitable for a variety of other uses such as housing, education, amenity space or key worker accommodation, for example."

And addressing the idea of a local bond, he said: "It would need to be retail bond offered only to Jersey residents and would incur greater cost than the sterling public bond issuance alternative in terms of the required rate paid and the costs of administration.