The U.S. Virgin Islands appears poised to refund $811 million of speculative grade matching fund bonds after its Senate approved a bill authorizing the transaction.
On Monday afternoon the U.S. Virgin Islands Senate voted 14-0 to approve the refunding that officials said would prevent the USVI pension system from running out of money, which the government’s actuary says could happen in October 2024 or sooner.
Siegel Actuarial Consulting says the system has $5.8 billion in net unfunded pension liability. According to Moody’s Investors Service, the island’s adjusted net pension liability was $3.3 billion as of fiscal 2019. Moody’s has cited the government’s pension system’s unfunded pension liability as key in explaining its speculative rating.
Sen. Kurt Vialet said he expected Gov. Albert Bryan Jr. would sign the bill on Tuesday or Wednesday. Vialet said he expected the deal will be priced in the first half of March. There is no statutory interest rate cap included in the bill, which had been a holdup for getting previous deals done.
The new bonds are likely to mature out to 2039, said David Paul, president of Fiscal Strategies Group, the USVI’s financial advisor, said at the Monday hearing. The governments’ agreements with rum companies, which underlay the matching funds bonds, run through 2039.
“We don’t know that we can sell bonds beyond 2039,” Paul said. “It’s advantageous if we can but that’s effectively a market factor that we won’t know until we get closer to the market.”
In the transaction the Virgin Islands government will first sell the matching fund revenues, which come from fees on the sale of the territory’s rum sold in the United States, to a newly created “special purpose corporation.” That corporation will be selling the bonds. The proceeds from the sale will be used to call or defease all U.S. Virgin Islands Public Finance Authority matching fund bonds.
The government will pledge $158 million per year of the matching fund revenues over the next 30 years. The first lien of this will be for debt related costs to the securitization corporation. The balance will go to the islands’ pension system, the Government Employees Retirement System.
Samuel A. Ramirez & Co. and Jefferies LLC are expected to be the co-senior managers of the bond deal.
The success of the bond in preventing the pension system from running out of money depends on a 6% rate of return on GERS investments, continued cover over revenues at current levels of rum production, and the gaining of certain interest rates in the bond sale.
If all goes according to plan, the actuary believes the transaction would assure the pension system would not run out of assets in the next 30 years and, indeed, would increase its assets in the 2040s.
The government would lower debt service payments and use the resulting revenues as well as other funds to support GERS, Bryan said in his State of the Territory speech on Jan. 24. Bryan said this new proposal does not “’kick the can down the road’; it crushes the can. It solves the GERS crisis for decades to come.”
Paul noted that because interest rates have risen dramatically to start the year, “time is not on our side.”
Sen. Marvin Blyden said he hoped the Senate’s passage of the bill would start to change investors’ mindset about the U.S. Virgin Islands.
Moody’s rates the existing matching fund bonds Caa2 and Caa3. Moody’s did not immediately comment on whether it would rate the new deal. In October 2017, S&P Global Ratings pulled its CCC-plus rating.
John Hallacy, principal at John Hallacy Consulting, said, “it is certainly more acceptable to finance a corporate [bond] with such a rating.”
“Municipals of this credit quality generally come to market on an unrated basis,” Hallacy said. “A one billion [dollar] high-yield transaction is a bit more challenging to get placed than a smaller transaction.”