CM sets out long-term plan to repay £500m facility, offers details on Sovereign Wealth Fund

Chief Minister Fabian Picardo used his Budget statement to set out a long-term refinancing plan for the £500m facility obtained during the Covid pandemic, alongside details on Gibraltar’s new Sovereign Wealth Fund, which he said could grow to between £700m and £1bn over 35 years.

Mr Picardo said the borrowing had been necessary during Covid-19 to fund salaries, support workers and frontier workers, and ensure the Gibraltar Health Authority was properly funded.

The Government had to date drawn down £475m of the £500m facility, which was secured at sovereign rates thanks to a UK sovereign guarantee granted to Gibraltar.

Mr Picardo said the last £51.5m drawn down on the facility related to spending linked to the treaty, and the facility has now been renamed the Covid, treaty and security facility.

The Chief Minister recalled how the original £500m facility had been secured with a UK sovereign guarantee during the pandemic and said the UK remained willing to extend that support.

But he told Parliament Gibraltar had now secured market interest at the same rate it would have achieved with a UK sovereign guarantee, but without needing one.

Mr Picardo said the refinancing had been structured across three maturity tranches of 15 years, 20 years and 25 years.

He said most of the financing was concentrated in the 20-year tranche, reflecting strongest investor demand and matching Government requirements.

He said the arrangement followed months of work with NatWest Bank and discussions with international investors in the UK and the United States.

According to Mr Picardo, investor demand exceeded the amount Gibraltar sought to raise, which he said reflected confidence in Gibraltar’s economy and public finances.

Mr Picardo was critical of GSD MP Roy Clinton, who he said had urged the Government to fix a refinancing plan at a time when interest rates were rising rapidly and markets were volatile.

He said Mr Clinton had been “panicking” when the Government instead entered a three-year facility in the belief interest rates would fall.

“When Mr Clinton implored me to fix this country's borrowing for a generation, the Bank of England base rate stood at 5.25%,” Mr Picardo said.

“Today it stands at 3.75%, a full point and a half lower.”

That represented a saving of £165m, Mr Picardo said, adding Mr Clinton’s course of action would have proved “a hugely expensive mistake”.

“Now is the time to fix,” the Chief Minister told Parliament.

Mr Picardo said the new facility had been secured despite the Opposition’s criticism of the Government’s handling of public finances and the economy.

He said an international rating house had given Gibraltar a grade sufficient enough to borrow as if the UK sovereign guarantee remained in place, “but without it”.

“Whilst here we are being talked down by the Honourable Members opposite, in the real world financial institutions who are x-raying our economy, our public finances and our borrowing, directly and indirectly through Government companies, are rating us highly,” Mr Picardo said.

He said the facility was being priced within the next 72 hours and that he would have a final rate by the time he delivered his reply at the end of Budget session.

The Chief Minister also announced that, from this financial year, the Government would make a minimum annual contribution towards reducing public debt of £5 million or 10% of the annual surplus, whichever was greater.

Mr Picardo said this marked the start of a disciplined programme of debt reduction.

SOVEREIGN WEALTH FUND

Alongside the refinancing plan, he gave Parliament a detailed explanation of the new Sovereign Wealth Fund, which was first announced in his New Year statement.

He said the fund’s first investments were in the UK elderly care sector and stressed that no public money had been used to acquire the assets.

Instead, he said, the Government had provided credit support rather than capital, allowing debt raised in the capital markets to finance the purchases.

In return, Gibraltar receives an annual fee and a share in the underlying assets over time.

“The Government has not spent a single pound of the people's savings to acquire these assets,” he said.

“It has not committed capital.”

“What the Government has done is lend its credit, and only its credit, to support the financing that acquired them.”

“Our credit is valuable for the very reason I have just explained to the House that we can dispense with the UK sovereign guarantee [and] because we are now able to borrow at rates associated with a very high private rating.”

“In return for that support, Gibraltar receives a dependable annual fee and a substantial share of the assets themselves over time.”

Mr Picardo described this as value created for Gibraltar “without capital drawn from the public purse”.

He said the mechanism was “neither novel nor untested”, adding the use of public credit to support privately financed assets, known in the UK as private finance, was long established and widespread.

“For decades, central government, the National Health Service and local authorities across Britain have used structures of this kind to fund hospitals, schools, roads and care infrastructure,” he said.

The investments of Gibraltar’s sovereign fund are spread across three care home portfolios in the UK, diversified by operator, region and type of care, including residential, nursing, dementia and specialist provision, Parliament was told.

The debt supported by the Government totals £544.7 million and is secured against care-home real estate valued at £722.9 million, leaving what the Chief Minister described as a surplus of value over debt of £178.2 million.

The Sovereign Wealth Fund is structured with several layers of protection designed to reduce the risk of any liability falling on Gibraltar Government.

The Chief Minister said any shortfall would first be met from cash held within the care home portfolios themselves, before support was drawn from the other portfolios, dedicated reserve accounts and, in one case, a rental indemnity insurance policy.

He added that the Government’s position was further protected by real estate valued well above the debt it supports, cross-collateralisation across the portfolios, legal mortgages over the properties, security over shares in the companies involved, and rights to step in if there is a default.

Quarterly reporting, dividend restrictions and English-law documentation are also built into the structure, which Mr Picardo said was designed to keep the Government’s exposure limited and backed by clear routes for recovery.

Parliament was told the Government would earn in two ways, including through an annual credit support fee and through a retained share in the value of the real estate once the financing had been repaid.

The annual fee, Mr Picardo said, was equal to 20% of the principal rent across the portfolios and would generate about £5.6 million in the first year, with rents linked to inflation.

Gibraltar also holds a share in the property companies behind the portfolios, which Mr Picardo said would be worth about £180 million on today’s values at the end of the 35-year term, and potentially more over time.

He said conservative estimates suggested the fund could produce between £700 million and £1 billion for Gibraltar over 35 years.

Mr Picardo said that would be enough to repay the Covid debt in full and still leave substantial value behind.

He described the programme as a long-term source of income and asset growth designed to strengthen Gibraltar’s balance sheet without using the public’s savings.

DEBT

During his address, Mr Picardo said net debt stood at 21.4% of GDP and aggregate debt at 27.5%, with the borrowing ceiling set in legislation by the last GSD administration at 40% of net debt.

“We are well beneath that borrowing limit,” Mr Picardo said.

“We have a headroom of £604.5 million of further borrowing which we have no intention of taking. But we have it, should be need it.”

Mr Picardo said the GSD had made the same predictions every year for 15 years, that “the bubble would burst” and that “bankruptcy was around the corner”.

“And every single year, the sun came up over the Rock, and Gibraltar was richer, and the worker was better paid,” he said.

“There is a word for a prophecy of doom that fails 15 years running. The word is ‘wrong’.”