10% PLUS: Interest for Aruba is Rising but not in a Good Way

Arubans are proud people, and whenever interest rises for Aruba we show our feathers with pride, but not every rise of interest is good. I will elaborate. The Secured Overnight Financing Rate (SOFR) has become an important metric in the financial world. It is a comprehensive indicator of the overnight borrowing cost, secured by the U.S. Treasury securities. To understand its importance fully, one must consider its relation to the London Interbank Offered Rate (LIBOR) and whether SOFR replaces LIBOR or coexists. The LIBOR was unsecured, and based upon quotations provided by a group of banksSOFR is designed to address some of the shortcomings and risks associated with LIBOR. The LIBOR has been a longstanding benchmark for short-term interest rates. It has faced issues, including certain vulnerabilities and declining underlying transaction volumes. Financial regulators have initiated efforts to transition away from LIBOR and develop more robust and transparent benchmarks. The SOFR uses U.S. Treasury bills for collateral and is data-derived. The SOFR is to be a more robust and transparent benchmark. It is increasingly being adopted to ensure the accuracy and stability of interest rate calculations.

October 11th, 2023, US$ 545,700,000

On this date, Aruba passed legislation to migrate from the LIBOR to the SOFR as a benchmark for financing Aruba’s foreign debt. This was due to four (4) loans Aruba has: US$ 113.000.000, US$ 52.000.000, US$ 127.400.000, and US$ 253.300.000. Collectively, a whopping US$ 545,700,000. This is even more money than the Dutch loan(s) I wrote about last week. A national decree backs up each loan.  The LIBOR was used to calculate the interest on these loans.​​ However, the government deemed the LIBOR no longer representative as of June 30, 2023. As a result of this, the government amended the applicable legislation – and likely the loan agreements as well – to amend the reference to the London Interbank Offered Rate for the calculation of interest in the underlying national decrees authorizing the loans  and to replace them with references to the Secured Overnight Financing Rate (SOFR). 

Changes

Several changes have been made to the various national decrees Landsbesluit Financieringsbehoefte affecting multiple loans. 

In the resolution of the Landsbesluit Financieringsbehoefte 2013-V, Section VI is amended to introduce the concept of “Adjusted Term SOFR,” an annual interest rate determined by adding the “Term SOFR” to the “Term SOFR Adjustment.” The “Base Rate” is also introduced as a variable annual interest rate calculated based on various factors, including the prime rate announced by the Administrative Agent, the agent responsible for attracting and managing the loans. Similar amendments are made in the resolutions for 2014-III, 2015-II, and 2020-I.

The amended Landsbesluit Financieringsbehoefte 2013-V. 

The new interest on this loan from March 2023 to September 23 will be (or was) 10.54289% and is calculated by taking the fixed interest rate of 5.42829% and adding the “Applicable Margin” (currently set at 5.00%, subject to periodic reviews based on the “Debt Rating”) to determine the overall interest rate applicable for a given “Interest Period.” This ensures that the interest rate reflects the fixed component and any Aruba/country risk associated with the debt, as indicated by the “Applicable Margin”. For each subsequent “Interest Period” following the initial period from March 2023 to September 2023, the annual interest rate is calculated differently. It can be equal to the “Adjusted Term SOFR” or the “Base Rate” under specific circumstances. Here are the circumstances. 

The “Adjusted Term SOFR”. If the “Adjusted Term SOFR” can be established according to the terms outlined in the loan agreement, will be used as the interest rate. These loans are not governed by Aruba law but by New York law. Perhaps a quick reminder that we are not so independent as our politicians would like to think.

“Base Rate”. If any of the following situations occur, the interest rate will be based on the “Base Rate”: (a) The “Adjusted Term SOFR” cannot be determined as described in the loan agreement. (b) A majority of the lenders specified in the loan agreement deem that the “Adjusted Term SOFR” does not adequately and reasonably reflect the costs associated with providing the loan. (c) A lender determines that it has become unlawful to provide, maintain, or finance the loan. In any of these cases, the interest rate will be adjusted by adding the previously mentioned “risk margin” to the chosen rate, be it the “Adjusted Term SOFR” or the “Base Rate”.

This means that we will pay from March 2023 to September 23: 10.54289% on this loan, and after that, the rate will be adjusted based on the “Adjusted Term SOFR” and the “Base Rate”.

The “Adjusted Term SOFR” is an annual interest rate that is calculated as follows:

• Start with the “Term SOFR,” which is another interest rate.
• Add the “Term SOFR Adjustment” to it.
• But there’s a rule: If the result of this calculation is ever less than 0% (which means it’s negative), then we treat it as 0%. 
• The “Term SOFR” is determined based on the rules mentioned in the loan agreement.
• The “Term SOFR Adjustment” is always set at a fixed percentage of 0.42826% per year.

The “Base Rate” is a flexible annual interest rate, and is determined in one of three ways, whichever is the highest at the time:

• It can be the interest rate that the “Administrative Agent” announces as their “prime rate” from time to time.
• Or, it can be the “Federal Funds Effective Rate,” which is increased by an additional 0.5%.
• Lastly, it can be the “Adjusted Term SOFR” for one month, increased by 1.00%.
• But, it will never go below 0%.

In plain terms, when we are borrowing money and paying interest, our interest rate could be either the “Adjusted Term SOFR” (which follows specific rules) or the “Base Rate” (which is determined by specific factors), whichever is higher at the time. And the lenders implemented some safeguards to ensure your interest rate won’t drop below 0%.

Landsbesluit Financieringsbehoefte 2020-I:

The “Interest Period” starting in December 2022 and ending in June 2023, the interest rate will be a fixed percentage of 5.158710%. Additionally, there will be an extra charge called the “Applicable Margin,” which is 5.00% of the loan amount based on the current debt rating. This brings us to a rate of 10.158710%!

In this instance, the “Adjusted Term SOFR” is an annual interest rate. It’s determined by taking the “Term SOFR” and adding the “Term SOFR Adjustment.” However, if at any point, either the “Term SOFR” or “Adjusted Term SOFR” falls below 0%, it will be considered as 0%. The “Term SOFR” is calculated according to the terms outlined in the loan agreement, and the “Term SOFR Adjustment” is a fixed percentage of 0.42826% per year. The “Base Rate” is a variable annual interest rate that is calculated as the higher of (a) the interest rate periodically announced by the “Administrative Agent” as its “prime rate,” (b) the “Federal Funds Effective Rate” plus 0.5%, or (c) the applicable “Adjusted Term SOFR” for one month plus 1.00%. However, the “Base Rate” will never go below 0%. 

The interest rate for this loan is determined based on a combination of fixed and variable components, including the “Adjusted Term SOFR” and the “Base Rate,” with specific rules to prevent it from going below 0%.

The other two decrees are amended similarly, yielding different interest rates, including 10.05743%! All and all this brings us to yields that surpass 10%, based on the current market conditions and Aruba’s financial risk model. 

This model could become even worse, meaning the Applicable Margins, can go up as of Janaury 1st, 2024 if the government fails to comply with the governance, compliance, and accountability standards. The question is why the government is so afraid or averse to implementing these standards.

Is the Dutch loan of 6.9 excessive?

In my last week’s column in www.Trempan.com on LinkedIn or my blog, I argued – before I learned about this new law – that the 6.9% rate Aruba agreed to as interest on the Afl. 916 Million was high but not excessive, considering an analysis of the historical interest rates Aruba had been paying. Let us not forget governance, compliance, and accountability anchored in a Raft would have given us a 3.2% rate of the Dutch loan(s). This new information supports my arguments, and one can even classify the 6.9% as cheap funding. 

No big announcement!

These 10% plus interest rates are big, actually huge. As these continue to rise, we will be getting closer to APR rates for credit cards in the USA. 

I am (not so) surprised and (yet) somewhat disappointed that the government of Aruba, specifically the finance minister, didn’t share this big, important, and very relevant information with “we the people”. It almost appears that the government didn’t deem this information worthy of a press conference or a press release. Our parliament didn’t bother either, not one of the 21 members. 

Conservative (or optimistic) estimates were that the interest would be around 7%. Crossing the 105 wasn’t envisioned. How are we ever going to pay this debt? Will we default? Aruba and our future generations are strapped down with debt with no real hopes of change anytime soon – an alarming outlook. Yet few seem to care…#YourFavoriteColumnist #YourFavoriteLawyer