CIG Draws US$393M in Local Loan Funds, Invests in US Treasury Notes
Move will fund approved 2022-23 CapEx, allow CIG to avoid expected interest rate hikes
The Cayman Islands Government will this month withdraw the remaining US$393 million of a US$403 million “Line of Credit” loan facility executed in December 2020 with a consortium of local banks and simultaneously invest the proceeds in 2-Year US Treasury Notes.
The move is aimed at reducing interest costs for approved borrowing to fund upcoming capital projects through 2023. By investing in US Treasury Notes until the funds are required for use, the Government will also earn interest, thereby further reducing borrowing costs.
Deputy Premier and Minister for Finance & Economic Development Hon. Chris Saunders said, “Utilising the existing local loan facility allows Government to borrow at a fixed rate of 3.25% per annum for a 15-year duration. 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.”
In July 2021, Government withdrew US$10 million on the facility in order to comply with the terms of the Loan Agreement and keep the facility valid/available to Government. On 7 June 2022, Cabinet made the decision to draw-down the remaining US$393 million.
Deputy Premier Saunders noted that the Government made this decision now, as the rate of 3.25% was available to Government only until mid-June 2022.
He said, “The US Federal Reserve is expected to meet a further five times in 2022, in June, July, September, November and December. Yesterday, the US Federal Reserve announced a 0.75% rate increase and the Fed could increase rates by a further 0.5% at each of those four remaining meetings. Those interest rate hikes could translate in Government being faced with a borrowing rate of up to 6.75% p.a. (which is the existing 4.0% Prime Rate plus yesterday’s 0.75% increase and, a possible further 2.0% for the remainder of 2022) if the existing loan facility is not fully utilised before the expiration date of 18 June 2022.”
Deputy Premier Saunders explained, “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. I am certain that a loan facility at 3.25% fixed for 15 years represents a superior position to any potential future loan facility we could secure given that interest rates are sure to rise.”
He also noted that there are no penalties to be levied on Government if it wishes to repay the loan before its possible 15-year tenure. An earlier than planned repayment of the facility is a means of reducing interest expense that Government would otherwise face.
Deputy Premier Saunders recalled that on 8 December, 2021 Parliament granted the Government an appropriation to borrow a total of CI$349,137,500 for 2022 and 2023.
He explained, “The Government’s budgeted CapEx programme for 2022 and 2023 totals CI$365.4 million, which is reasonably close to the US$393 million (equivalent to CI$329 million @ 0.8375) available under the existing loan facility. Access to the remaining US$393 million loan facility will enable Government to fund its 2022 and 2023 CapEx programme, without additional borrowing at higher interest rates.”
Deputy Premier Saunders very clearly stated that the loan funds drawn-down will not be used to fund Government’s day-to-day operating expenses.
He said, “Such expenses are covered by Government’s revenues, and that is how it will remain. The loan funds are to be used for capital projects only.”
To further offset interest costs, the Government intends to invest the US$393 million in 2-Year US Government Treasury Notes, until such time as the funds from the loan proceeds are required to pay for its CapEx programme.
Deputy Premier Saunders explained, “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.”
Four local banks expressed an interest in acting as custodian/broker on behalf of the Government in purchasing the 2-Year US Government Treasury Notes, with CIBC FirstCaribbean International Bank being the successful entity.
Deputy Premier Saunders said, “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. 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 continued, “Obtaining funding for our Capital Expenditure and Capital Investment programme for 2022 and 2023 at a modest cost has led Government to the aim of not engaging in any further borrowing for the remainder of this term – that is the 2024 and 2025 financial years.”
The Deputy Premier noted that as at 31 May 2022, Government debt stood at CI$206.4 million and the draw-down of loan funds in June 2022 will increase this balance to CI$535.5 million. However with a projected Gross Domestic Product (GDP) of CI$5.4 billion at the end of 2022, the Cayman Islands’ resulting debt-to-GDP ratio of 9.9% remains amongst the lowest in the world – and is a very modest debt metric.
Additionally, Deputy Premier Saunders commented, “This increased cash in-hand will enhance the country’s ability to respond to any emergency that might arise in these challenging times.”
He concluded, “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. There is no doubt that if Government did not utilise the current available loan facility and, sought to negotiate a new facility in the future, that the future facility would be costlier to the country.”
The Ministry of Finance & Economic Development executed a loan agreement on behalf of the Government with a consortium of four banks on 18 December 2020 for US$403 million at a fixed rate of interest of 3.25% p.a.
The borrowing is comprised of two facilities. Facility A is an 18-month short-term loan and Facility B is a 15-year long-term loan. The consortium is made up of four Class A local banks, as follows:
- Butterfield Bank (Cayman) Limited
- Cayman National Bank Ltd.
- FirstCaribbean International Bank (Cayman) Limited
- RBC Royal Bank (Cayman) Limited
Submitted by: Ministry of Finance & Economic Development (CIG)