Tucker’s Point Bankruptcy

September 13th, 2013 by De Onion

It should come as no surprise that an 88 room hotel with $150m in debt is in receivership.

88 rooms, $150 million in debt = $1.7million per room. Debt service costs of roughly $300 per night per room.

Average room price of say $595 per night, 70% occupancy = revenue per available room of $416 per night on average.

So with the cost of financing eating up ~70% of hotel revenues you’re never going to be able to make a profit.

I know Tucker’s Point has the club and other revenue generators but even so the underlying numbers are so awful that we should never realistically expect new build hotels to make money in Bermuda unless there is some radical change in the economics. It is also a vindication of BEST’s economic argument against the SDO and another slap in the face of the PLP Ministers who seem to have fallen hook, line, and sinker for bad arguments for granting the 2011 SDO.

Bermuda’s bonds trading at ~3% yield

April 6th, 2013 by De Onion

That’s really impressive. They’re thinly traded so the pricing is probably not too meaningful of actual market value, but still…

“We need foreign capital.”

February 27th, 2013 by De Onion

Not all foreign capital is created equal. We need to be smart about how we get money into Bermuda. In order of the value of foreign capital:

1. Earned from global business and paid as salaries to Bermudians. The paycheques of Bermudian employees by definition come in from overseas and get put straight into Bermudian pockets – then those Bermudians go out and spend it, sending money zinging around Bermuda.

2. Earned from global business and paid as rent/expenses to Bermudians. All the service companies that do work for global business, all the rent payments to Bermudian landlords. Again, straight into the pockets of Bermudians and then around the economy – especially to the service companies.

3. Earned from global business and paid as salaries to non-Bemrudians. A large fraction of these paycheques are immediately paid to Bermudians as rents, another fraction to Bermudian businesses in services, and purchases, and a smaller fraction goes with them when they leave.

The worst possible thing we could do is sell local land or companies to foreign businesses. For the most part these transactions tend to just put temporary money into the pockets of the Bermudian former owners at high valuations and then imply an endless stream of dividend payments out of Bermuda’s economy in perpetuity.

Popular vote for Premier

January 22nd, 2013 by De Onion

What’s interesting is that the next OBA vote for its leader will in effect be the popular vote for Premier (at least from that side of the House’s MPs). Pay your $5 to the OBA, show up at the election, and you too can have a vote.

Defaulting Cities

December 3rd, 2012 by De Onion

First, here’s a link about bankrupt municipalities in the USA. Link

Recently Bob Stewart has also started sounding the drum on the Bermuda government’s impending bankruptcy.

Link

People believe that governments cannot go bankrupt. Well just look at big countries like Argentina and Greece, or small municipalities like Pritchard.

The bond holders, owners of government debt, hate bankruptcy because it requires them to take a hit on what they thought were ultra-safe investments. After all, nothing is safer than lending to governments — or so they mistakenly thought.

What brought these financially underwater cities to their knees were crushing medical and retirement obligations to public workers and to seniors. This brings me to financial issues facing Bermuda.

Much has been said during election promises that seniors in Bermuda need not worry about such things. Indeed, the Minister of Health, Zane De Silva, stated that seniors have no need to be concerned about health costs because government will stand behind its many promises. Good luck — I feel reassured.

The real problem is — as The Royal Gazette pointed out in an editorial on November 21 headlined ‘Petrifying Pensioners’ — that such promises have not been costed, and medical costs are rising at an unsustainable level. But who needs to worry about costs when the full faith and credit of Bermuda stands behind such promises?

I think he is far too optimistic. Based on my models Bermuda is already beyond the point of being able to make its debt payments. If anything, this is the last year it has a hope of turning it around. The government’s numbers are wildly optimistic or outright stilly. The biggest howler is that the government estimates it will only spend half as much on debt this year as it did last year ($35 million vs. $70 million) despite having run up hundreds of millions more debt. My best guess model is that the Bermuda government will have a deficit on the order of $350-$400 million making a few assumptions.

- The government will under-collect revenue due to lower than expected payrolls and customs duties.
- The government won’t sell the buildings it had intended to sell to raise cash (they haven’t even started trying and if they do they won’t be able to sell).
- The government aimed for $130 million in spending cuts between last year’s record budget and this year’s. Those won’t materialise because they were dependent on false-savings by not paying pensions which does not appear to have been implemented.

It’s possible to turn it around and prevent a default – but it will take real spending cuts and a total reversal of Bermuda’s economic decline.

Rumours of voter fraud

November 14th, 2012 by De Onion

No idea how much of these are just election time nonsense, but nonetheless it’s a very serious concern.

I’m now hearing rumours that people are being registered to vote at friends’ houses in marginal constituencies and other instances of potential voter fraud. It’s almost certainly small-scale, but with some constituencies likely to be decided by a handful of votes every little bit counts.

Dishonest Election begins

November 6th, 2012 by De Onion

Well, the PLP’s ads have started to appear everywhere.

365 day a year tourist

November 3rd, 2012 by De Onion

Bermuda’s economy has undergone a shift that few seem to recognise: The rise of global business has spawned the 365 day a year tourist who lives in a Bermudian owned hotel. That “hotel” is actually a rental house or apartment.

We would do well as a nation to rubber stamp foreign exchange generating work permits in exempt companies and seek to build large “hotels” in Hamilton to house these people. With the right policies it can be done, and will cement Bermuda’s place as a global business centre.

Well, that settles it.

November 2nd, 2012 by De Onion

It seems that Junior Finance Minister David Burt has said:

Looking forward, Senator David Burt has, remarkably, stated that there will be no reduction in Government spending for the next three years.

We can only conclude that the PLP intends to bankrupt Bermuda. 3 more years without a spending cut would mean roughly a billion dollars of new debt by the end of 2015, which would in turn imply the Bermuda government having less revenue after debt service than it did in 2005 – and between 2005 and 2014 prices will have risen roughly 30%. After inflation the real value of the government’s after-debt cashflow could be under $600 million. That’s about what the government spends on staff at present, so if it wants to borrow more and not cut jobs then it’ll have to cancel the electricity, stop ALL social programmes, and not even send Ministers on fancy holidays.

While your assumptions may lead to slightly different numbers – the outcomes are the all the same. Deep cuts are inevitable – and the longer government waits the deeper they will be. As soon as the lenders stop lending the cuts will come.

As Alan Card said “He was underwater and he had his arms wrapped round the fish and the fish was pushing him under… (and) I knew there was no good going to come out of it.“

How Close to Going Greek?

November 2nd, 2012 by De Onion

The recession will continue without radical change.

Assuming Bermuda keeps its $5.5 billion in real GDP this year (unlikely) the government deficit could easy end up at over $300 million (~1.2 billion spending, ~870 million revenue). That $300 million gap will have to be closed in the very short term through spending cuts – and depending on the multiplier one uses it will inevitably pull another ~5% off the GDP. That GDP loss will be concentrated virtually entirely in the civil service and government contractors.

If that happens swiftly because Bermuda loses access to financing then the fallout will be catastrophic – especially to the PLP’s electoral chances if they form the government after this election.