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Policy & Resources Committee releases details regarding Revolving Credit Facility terms

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Monday 29 June 2020

Further to the announcement on 4 June 2020 that the Policy & Resources Committee had secured a £225m facility for public finances during the COVID-19 response (available here), and following discussions with the five local banks providing the facility, the Committee is releasing further details of the terms.

While the States agreed short-term borrowing of up to £250m to meet short-term cash requirements as a result of the implications of the COVID-19 pandemic which is having a major impact on Guernsey's public finances, the Policy & Resources Committee continued to review the likely implications for public finances of the ongoing crisis and was confident that a facility of £225m would be sufficient to provide the necessary funds in the short-term whilst still allowing sufficient 'headroom'.

A Revolving Credit Facility ('RCF') provides committed funds, namely the lender is under an obligation to advance money when requested, as opposed to an uncommitted facility where the lender has discretion as is often the case with an overdraft. An RCF is typically utilised where the amount of funding required will fluctuate over the period. There is a maximum amount under the facility which the lender has committed to make available on demand. Interest is paid on the amount drawn-down and a considerably smaller non-utilisation fee is paid on the amount not drawn-down. This is considered to be the most appropriate and cost-effective mechanism for the States' requirements as revenues fluctuate during the year - for example, they are higher in the months in which quarterly income tax contributions are received.

There is a syndicate of five Banks providing the RCF for the States of Guernsey in the sum of £225,000,000 comprising:

Each bank has an equal pro rata commitment (ie each bank has committed to making funding of up to £45million available). The States of Guernsey may cancel the whole or part of the total undrawn Facility at any time with no cancellation fees.

The Facility Agreement has an initial termination date of two years and contains an option for the States of Guernsey, which they are not obliged to exercise, to extend the termination date of the Facility by two 1 year periods (2+1+1). Such extension is exercisable in advance at the end of year 1 and 2 respectively. The exercise of the second extension would require further approval of the States of Deliberation prior to the end of year 2 of the term of the Facility Agreement. The RCF is unsecured and the States do not have to provide any assets as security.

The costs of the Facility are:

Arrangement Fee

0.25%

Extension Fee

(if Facility is extended beyond two years)

 

0.125% per annum

Applicable Margin (interest payable)

0.80% over LIBOR

Commitment Fee (non-utilisation fee)

(% of Applicable Margin) on unused Facility

 

35% (of 0.80%)

The set-up fees (advisory and legal costs for all parties) were approximately £300,000 and an annual agency fee of £30,000 is payable to the Bank who is acting as agent.

Over a two year period, the total fixed fees (arrangement, advisory, legal and agency) are expected to total in the region of £925,000, which is 0.2% per annum of the total Facility amount.

Based on a LIBOR of 0.5%, interest of 1.3% per annum (0.8% plus 0.5%) would be paid on the amount of the Facility drawn-down and a non-utilisation fee of 0.28% (35% of 0.8%) would be paid on the amount of the Facility which has not been drawn-down.

By way of simple example, if £200million of the Facility is used for the whole of Year One; £50million of the Facility is cancelled at the end of Year One (i.e. reducing it to £175million); and £160million of the Facility is then used for the whole of Year Two, and LIBOR is 0.5%, the cost of the Facility would be:

Based on a £225million Facility in Year One and a £175million Facility in Year Two, the non-fixed charges (margin and commitment fees) equate to approximately 1.2% per annum.

It should be noted that in reality, there will likely be multiple loans drawn-down during the Facility availability period (in tranches to meet the States' liquidity requirements) and LIBOR will also be expected to fluctuate over the term.

Deputy Lyndon Trott, Vice-President of the Policy & Resources Committee said

"The terms of this Facility are very favourable for the States of Guernsey. Our track record of fiscal discipline together with our clear intentions, subject of course to future States approval and strong reserves, are the reason we've been able to secure terms of this nature. 

Again, I'd like to thank the five local banks who have worked with us to ensure this liquidity is available to our community.  It will be essential in meeting the financial challenges we face as a result of the COVID-19 pandemic, and enable us to continue to support the individuals and businesses most affected by it."

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