© Guardian photo by Brian McInnis
Wes Sheridan, minister of fiance, energy and municipal affairs, gestures as he speaks to reporters in Province House Wednesday.
The P.E.I. government is borrowing $75 million to lock in an ultra long-term bond – a move that will help stabilize the province’s interest rate risk.
The money will go into a 40-year bond, locked in at an interest rate of 3.60 per cent.
This will be used to convert short-term loans already held by the province, whose interest rates could spike at any time, into more predictable long-term debt.
Finance Minister Wes Sheridan said the interest rate for this bond is signficantly low for this length of bond. Locking in at this low rate will help stabilize the debt currently held by the province for the next four decades.
“It’s an incredible rate for a long period of time, which locks that in for all administrations outside this electoral cycle and makes it good for Islanders. Period,” Sheridan said.
As of March 31, 2012, the province had $521 million in short-term loans, according to the auditor general’s 2013 annual report.
That has since been reduced by measures such as this latest one.
Last January, cabinet approved a total of $200 million in borrowing for the year to convert short-term loans into long-term debt. At that time it borrowed $125-million for an identical 40-year bond, also locked in at 3.60 per cent interest.
The finance department is now borrowing the remaining $75 million for another long-term bond.
“It’s important that we take advantage of these opportunities,” Sheridan said.
“This way we do pay down some short-term debt and gives us some security as to what the position would be out into the future.”
He acknowledged this move does shift the interest rate risk of the province into the future, when the bond eventually becomes due. At that time, the province may have to re-finance at higher rates.
But in the meantime, it provides greater stability to the province’s interest charges, which cost the province $107 million in 2012.
Auditor General Jane MacAdam, whose job it is to audit the province’s books every year, said she believes this is a smart financial move.
“I do believe it’s a good debt-management strategy because it helps to manage interest rate risk,” she said.
“Locking in at a lower rate for a long period of time, I think it’s a good measure.”