It’s not often that a debut sovereign issuer comes to the debt markets with an inaugural 40-year offering but the State of Jersey did just that last month with a £250 million deal that attracted £600 million of orders from traditional real money UK institutional investors, as well as big orders of up to £75 million each from European investors including private banks for bonds priced to yield just 52bp over the UK government.
| It is a transaction that will go down as one of the most successful in its class, pricing inside other |
That investors were eager for additional duration even as Bank of England governor Mark Carney started warning that bond markets had not understood the potential imminence of rate rises, reflects the issuer’s underlying credit strengths. Investors have grown used to stretching their limits on acceptable sovereign debt to GDP ratios. Jersey, a British crown dependency, is not in debt. It has assets and reserves to GDP. Rated AA+ with a stable outlook, it may even be upgraded above the UK to that now rarest of strata: a triple-A borrower.
“One thing we heard over and over on the roadshow is how impressed investors were with the balance sheet. Jersey is in a very strong financial position,” says Karan Shah, in syndicate at Barclays, one of three bookrunners.
“Getting to triple-A may be aspirational but it is also a realistic aim for Jersey. And this could be a very rare deal. Jersey has no plans for additional offerings. In the end, the pricing was so tight that some of the traditional big UK investors could not participate. They are more hungry for single-A rated borrowers paying higher yields.”
Jersey will ring-fence the proceeds from the transaction to on-lend to providers of affordable social housing, including the government-owned Andium Homes. Once these homes are built, the idea is that rental income should service the debt.
Treasury and resources minister, senator Philip Ozouf, tells Euromoney: “Jersey is a sovereign issuer which, as a crown dependency, falls within the ambit of the UK, which looks after defence and foreign policy, but we have complete fiscal and judicial independence. While a lot of governments borrow to fund services, we have taken an extremely prudent approach to public finances over many decades. This is a £3.7 billion economy with £5.6 billion in net assets.
"We have a small sovereign wealth fund but there are very strong public finance laws that mean it cannot be drawn for public expenditure. We won’t borrow for capital projects unless they promise an investment return and housing is the only project on which we are happy to borrow to invest. If we were ever to do another bond deal, it would only be for public housing.”
The State of Jersey has already put 4,200 exiting homes into a separate operating company to be upgraded through a three-year project and these will sit alongside newly built housing stock. The ministry considered whether this entity should borrow in its own right or with a full government guarantee before deciding to do a plain vanilla sovereign bond. Ozouf feels the strong investor response to the 40-year offering justifies that decision.
“It is a transaction that will go down as one of the most successful in its class, pricing inside other non-UK-guaranteed long-dated issuers. We met many investors on the road show that were pleasantly surprised by the hidden success story of Jersey.”
These investors had some tough questions, though. “The best questions are always the simplest,” says Ozouf. “How are we going to grow our financial services industry and how does it fit in an increasingly competitive world with an emphasis on transparency and regulation? I would say that Jersey is the only secondary financial centre to already have a centralized registry of beneficial ownership that works well, and that we are benefiting from a flight to quality and transparency.”
Jersey Finance last year commissioned a report from Capital Economics into the value that the UK derives from its dependency. Among other things, Capital Economics found that Jersey’s financial services sector intermediates almost £1 in every £20 of investment by foreigners into the UK and that the UK’s banking sector is bolstered by almost £120 billion of funding up-streamed from Jersey, which is equivalent to 1.5% of its total balance sheet, or two-fifths of the overall customer funding gap.
And while suspicions about tax evasion hang over even the best-regulated offshore centres, Capital Economics suggests the benefits to the UK exchequer from Jersey, which predominantly manages non-UK money, far outweigh any lost tax revenue.
Ozouf says: “This is a big financial centre that gathers capital from around the world that is up-streamed into the UK banking system. We believe strongly in the future of the City of London and have plans to grow our capacity to support it. We don’t think short term. We always think medium and long term, and that is why the bond market has rewarded us with such a long tenor and such a low coupon.”
He thinks he got a good deal from the bookrunners on the bond. “There are 13,800 people here working in financial services. We weren’t short of advice, but we are very pleased with the outcome.”