Thu 04/07/2022 18:15 PM
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USVI Press Release
Squire Patton Boggs Press Release

U.S. Virgin Islands government officials and their advisors today hailed the closing of the $955.5 million Matching Fund Special Purpose Securitization Corp., or MFSPSC, bond transaction that is aimed at stabilizing the USVI Government Employees Retirement System.

The transaction had a true interest cost of 4.74%, according to two sources familiar with the matter. While the deal delivered minor net present value savings to the government, propopents have emphasized that by refinancing outstanding matching fund revenue, or MFR, bonds and providing the government with a restructured bond payment schedule, the transaction will enable the government to make $158 million in annual payments to the GERS over the next 30 years. The new bonds retain their final maturity date of 2039, according to final pricing details.

The transaction also includes the issuance by the USVI Public Finance Authority, or PFA, of a GERS funding note, with an estimated par value of $1.7 billion, that is being contributed to GERS. This funding note will relieve the government from having to use general fund revenues to fund GERS. The issuance of the GERS note also required the pension fund to settle legal actions against the government.

Gov. Albert Bryan Jr. said the transaction addressed the “imminent insolvency” of the GERS, which was forecast to occur as soon as 2024. He called the transaction “a great leap forward to secure the pensions of our hard-working government employees, past, present and future” and said the stabilization of the GERS “provides a foundation for the continued positive transformation of the U.S. Virgin Islands.”

Karol Denniston, a partner with Squire Patton Boggs, legal counsel to the USVI government on the bond offering, said the transaction provides the USVI with a “sound legal framework and a stronger financial platform to overcome the funding challenges facing the pension system.”

Both the new MFSPSC bonds and the MFR bonds they refinanced are backed by rum tax revenue rebates that the U.S. government pays to the USVI government annually. The securitization structure created by law for the MFSPSC issuance involves a “true sale” of the rum tax proceeds to the MFSPSC and includes a statutory lien on those revenues and bankruptcy remote protections.

To satisfy U.S. Treasury Department requirements, the rum tax rebate receipts have to be deposited in a government-owned account. The securitization structure created a government restricted account that was controlled by a trustee with irrevocable instructions from the government to deposit those proceeds within two business days of receipt into a revenue fund from which debt service is paid. The transaction also required issuing a true sale opinion that satisfied Kroll Bond Rating Agency and underwriters Ramirez and Co. and Jefferies.

After bondholders are paid through the securitization structure, the remaining “residual funding” will be available for payments to USVI rum producers and to GERS via payments due on the GERS funding note. Any remaining proceeds then flow to the USVI government.

The GERS funding payments are not “bankruptcy remote” but they do have the benefit of a statutory lien created under the enabling legislation, and GERS would have legal remedies to pursue should the government in the future balk at complying with its payment obligations under the GERS note, according to sources.

“Bankruptcy courts and the district court overseeing the Puerto Rico cases have protected pensions, sometimes impairing bondholders in the process. Based on existing rulings protecting pension plans and pensioners, we think that the GERS note is probably going to hold up well over time. But for this transaction, the GERS would not have been able to fund pension payments starting next year,” Denniston added.

GERS actuary Segal estimates GERS’ unfunded pension liability at $5.8 billion and says it would become insolvent by October 2024 without an infusion of cash. In a report on the transaction, Segal said the securitization transaction with a final maturity date of 2039 would keep GERS solvent over the next 30 years assuming a 6% return on investment. If a lower 4% return is achieved, GERS would “temporarily run out of assets” from 2036 through 2039, according to the report.

The Bryan administration has tried to undertake a refinancing of the territory’s rum tax debt since 2020 to free up monies for the GERS and other spending priorities. USVI senators initially insisted on an interest rate hike and a transaction deadline that contributed to the administration’s decision to suspend the transaction in September 2020. The Senate twice rejected subsequent efforts by the administration to undertake a refinancing but wound up supporting this year’s effort largely because of the inclusion of the GERS funding note, which they said guarantees that any debt service monies freed up through the securitization would be contributed to GERS.

Bryan has also said that in addition to the rum bond securitization, refinancing the outstanding USVI Water and Power Authority, or WAPA, debt, particularly its high-cost $107.5 million capital lease obligation with Vitol, is another top priority. In his State of the Territory address in January, Bryan said WAPA and the USVI Public Services Commission should “immediately” commence a refinancing plan to take advantage of a favorable interest rate environment. Derek HasBrouck of PA Consulting Group, WAPA's independent consultant, said in November 2021 that negotiations to refinance the Vitol debt are “well underway.”

As part of its continuing disclosure requirements, UMB Bank NA, WAPA's bond trustee, posted a notice to EMMA today disclosing these fund balances as as of March 31:

  • Debt service fund $ 7.88 million;

  • Debt service reserve $ 9.8 million; and

  • Fuel tax escrow $ 1.39 million.

-John Marino, Seth Brumby

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