N.L. looks across the Atlantic to lower borrowing costs with launch of foreign bond program

The Newfoundland and Labrador government is set to begin issuing bonds on the London Stock Exchange as part of a new foreign borrowing program.

Premier Andrew Furey, who was in London on Monday, said the new program is an indication of the province's "much better" financial position, rather than a sign that the province is having trouble issuing domestic bonds.

"This is a way to try to diversify the portfolio but equally get a better rate," he said during a virtual news conference.

Furey said the risk to the provincial government is "very, very, very small." According to Finance Department officials, bonds will be hedged to Canadian fixed rates to mitigate the impact of currency exchange rates. Furey said issuing bonds through the London Stock Exchange will ensure regulatory protections are in place. 

Finance Minister Siobhan Coady, also in London on Monday for the launch of the program, said the provincial government will sell bonds through the European market only if interest rates are lower than the cost of borrowing through the domestic market.

"By coming to the European market we have good diversity and that helps to lower our cost of borrowing. We wouldn't place them on the European markets without having it being a lower cost of borrowing," Coady said.

Department officials said the province is starting with about $1.5 billion (€1 billion) in bonds on the London Stock Exchange but can raise or lower that amount depending on interest rates.

Coady said the program has been in the works for the past year and the provincial government has met with investor banks and pension funds about the borrowing program.

Coady said the provincial debt was about $16 billion as of last fall, and the provincial government's annual cost of borrowing is about $1.7 billion. 

If successful, Coady said, the new program could lower the province's cost of borrowing by millions.

Financial experts give program a thumbs-up

Erin Oldford, associate dean of Memorial University's faculty of business administration, said the creation of the borrowing program shows the provincial government is modernizing its treasury management.

"Looking to the European market for its borrowing means that we're broadening our investment base, and that's good news," she said.

Oldford said the program brings the province up to speed with its peers — Newfoundland and Labrador was the only province, other than Prince Edward Island, that did not already have a foreign bond program. Alberta and British Columbia sell some bonds on the London Stock Exchange; the other provinces sell bonds on the Luxembourg Stock Exchange. 

"We're able to access deeper pools of liquidity, and that means more money," she said. "There's going to be more investors who are going to be interested in buying our debt in the form of bonds, and what that does, by simple supply and demand, is that is going to push down on the cost of borrowing."

Larry Short, senior investment advisor at Short Financial, agrees the program is a positive step for the province but disagreed with Furey's assessment that issuing bonds in a foreign currency carries little risk, even with hedging.

"I have seen circumstances in the past where you get a severe movement of currency one way or the other," he said. "It really depends on how much is loaned there and the period of time."

Still, Short said the borrowing program is a good idea — though he would have liked to see it implemented sooner.

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