Jersey issued the first bond in its 800-year history to finance a renewal of its housing stock, and seized the opportunity to tell the crown dependency's story.
The Crown Dependency of Jersey has been an autonomous state for 800 years. While it is part of the British Isles and uses sterling as its currency, Jersey has its own legislature, enjoys fiscal and political independence and boasts its own language, Jersey French or Jèrriais. Until June 2014, however, Jersey had never tapped the bond markets.
“We do not have a policy of issuing bonds to finance debt. We are a major financial centre, we have a long-term, prudent economic strategy and a net asset surplus of £5.6bn [£9.49bn],” says treasury minister senator Philip Ozouf.
In recent years, however, the Jersey government realised that it needed to invest in its social housing stock, which accounts for about 14% of the island’s total housing infrastructure.
“Over the past three years, we have been thinking about how to structure and fund our social housing stock. We considered a number of different options, including bank debt, a private placement or bonds issued through a special purpose vehicle. But we concluded that a bond issued directly by the state of Jersey would be the most appropriate way forward,” says Mr Ozouf. “Social housing provides income in the form of rent and we can use that to pay the interest on the bonds and reinvest in the housing stock.”
In March, the island announced that it would be launching a debut bond transaction. The precise timing and pricing were to depend on market conditions but the rationale behind the fund raising was clear: to build up to 1000 new homes and refurbish many existing properties. Jersey also revealed its bookrunners – Barclays, HSBC and RBS, chosen after a highly competitive tender process. “As we are an international financial centre, a lot of banks pitched for this deal but we were very pleased with the bookrunners that we chose,” says Mr Ozouf.
Investor education
By this stage, Jersey had been awarded a credit rating of AA+ by Standard & Poor’s, which provided considerable comfort to potential investors. By the end of May, the necessary documentation was in place. Market conditions seemed benign so Jersey embarked on a three-day roadshow, starting on the island itself, before moving to Edinburgh and finally London.
“We are known for Jersey cows, Jersey Royal potatoes and knitted jerseys. And, of course, we are known as a financial centre, but investors did not know much else about us. They were interested in our 800-year history, our economic status and our prospects. It was a real opportunity to tell the Jersey story,” says Mr Ozouf.
Mr Ozouf was keen to issue a long-dated bond, in line with the island’s long-term approach to economic policy. As a debut issuer, it sought guidance by reference to similar credits, such as bonds issued by Cambridge University, Manchester University and Transport for London. These were issued at spreads of between 40 and 55 basis points over gilts and, after feedback from investors, initial price thoughts for Jersey were announced at 55 to 60 basis points over gilts. This was on June 2, when investors were also told the deal would be for £250m over 40 years.
Demand for the transaction grew strongly throughout the morning and the order book reached £600m by 11.45am. Guidance was then revised to between 52 and 58 basis points over gilts and at 12.30pm, the deal was priced at the low end of the range, leaving Jersey with a 40-year bond at a coupon of just 3.75%.
Good result
“We were very pleased with the result. The deal was well managed and well run and we were very glad to have achieved a spread at the low end of the range,” says Mr Ozouf.
The transaction also received interest from an extensive range of investors, so much so that there were 75 orders in the ultimate order book, highly unusual for a deal of just £250m. Orders ranged in size from £75m to £200,000 and 50 of the orders were for less than £5m, a number of which were from wealth managers located on the island. “Our roadshow was very successful and people were impressed with the quality of the credit,” says Mr Ozouf.
Jersey has waited 800 years to issue its debut bond and there are no immediate plans for a second transaction. The government does remain open-minded, however. “We don’t borrow for debt. We are borrowing for infrastructure projects so we may come back to the market in the future but only if our economic growth is even better than we expect and we need more infrastructure,” says Mr Ozouf.
