This recent news story about questions regarding the territory’s ability to sell bonds is being republished since a number of readers may have missed it during the holidays and because the subject matter is so important that we feel it is crucial that as many people as possible see it.
A major financial news service has raised questions about the U.S. Virgin Islands being able to sell bonds next year due to concerns that the territory will eventually have to "restructure" its debt at the expense of investors.
In response, one former V.I. government financial advisor said he believes restructuring is very likely, while another, current financial advisor says the concerns are misguided, the bonds are in high demand, very safe and the concerns are misguided.
The U.S. Virgin Islands has a current year deficit of about $110 million and structural deficits of nearly $170 million per year, in a locally-funded budget of around $850 million. The 2008 worldwide financial crisis and the 2012 closure of the Hovensa oil refinery on St. Croix played major roles in creating the structural deficit. V.I. government pay raises enacted this year account for about $30 million of the annual deficit too.
Gov. Kenneth Mapp’s administration had planned to cover the deficit by borrowing about $55 million for operating expenses and reduce yearly debt payments by $55 million through refinancing more than a billion dollars in existing debt at lower rates. But all three major international bond rating agencies: Fitch, Moody’s and Standard and Poor’s, downgraded V.I. bond debt this year, increasing the cost to borrow, closing the door on the chance to save by refinancing. Instead, the territory has to borrow the full amount or make draconian cuts that will ripple throughout the economy and reduce tax revenues further.
All three agencies cited the territory’s structural deficit, rapid debt accumulation, ongoing borrowing and reduced likelihood of being able to continue paying in full, as well as the massive shortfall in funding to the V.I. government pension plan. Fitch also cited federal legislation to help Puerto Rico restructure its debt. While the USVI is not included in that legislation, it raised concerns that Congress could step in at some point, according to Fitch.
In November, the Legislature approved $247 million in new borrowing, secured by gross receipts tax revenues and federal alcohol excise tax revenues remitted to the territory. It includes $147 million to keep the government running, make partial payments for government utility bills, mandatory waste management needs and urgent needs at the territory’s hospitals. The same bill included a "statutory lien" on those same federal rum revenues, with the goal of increasing confidence for lenders.
Recently, the Mapp administration decided to postpone the debt sale until after the new year.
According to Debtwire, a subscription-based news service that reports on corporate debt situations to an audience of financial analysts and investors, some analysts and hedge fund managers are concerned about the territory’s ability to repay. A Dec. 16 article by Simone Baribeau cites an unnamed hedge fund manager saying the territory does not have a strong likelihood of getting out from under its deficits without outside help and as a result V.I. debt restructuring is all but inevitable. Baribeau quotes the hedge fund manager doubting whether investors would want to purchase V.I. bonds right now. She also cites David Paul, a financial advisor to state and local governments and previous V.I administrations who also writes on financial matters for the Huffington Post, as saying the territory is likely to have to restructure, barring a major improvement.
Along with the other structural issues, when the territory’s pension system ceases being able to pay out full benefits around 2022, the government’s deficit will shoot up, Paul said when reached by phone Monday, echoing his comments to Debtwire.
Debtwire cites Andre Wright of Standard International Group, a financial advisor to the Public Finance Authority, saying the bond sale was moved to let market conditions settle.
Reached by phone Monday, Wright dismissed the notion that the bonds may be difficult to sell or that the territory was in any risk of default.
"There is no difficulty," Wright said Monday. "We have decided to postpone the transaction until next month, partially due to market conditions," he said. "As you know the Fed (Federal Reserve) has raised rates and is expected to raise rates three more times in the coming year. … We have a new president-elect who we think is going to be a positive to the territory but that is yet to be determined," he said.
The high-yield and tax free status of V.I. bonds make them desirable, he said.
"According to my information, as a financial advisor, the issue had nothing to do with market access. As you know V.I. bonds are triple tax exempt," he said. That means they are exempt from local, state and federal taxes, which increases their real payout to investors. Only New York City, selling to New York residents; Guam, the Norther Mariana Islands and the U.S. Virgin Islands, can issue triple tax exempt bonds now, he said. Puerto Rico used to be able to but does not have access to the market anymore, "so there is a demand for high-yield triple-tax exempt paper," Wright said.
The bonds would be secured by federal excise tax revenues which are independent of the local government’s revenues, making them very secure, according to Wright.
"The matching fund bonds are paid before the funds even reach the Virgin Islands, so we don’t see that money until after all the bond holders are paid," he said.
That has been the situation since 1989, while the recently approved statutory lien "gives an even further degree of protection," Wright said, adding that the territory has never defaulted on debt.
He contrasted the USVI with Puerto Rico, where he said federal excise tax money "went straight into their coffers to use as they wish."
"We don’t have that benefit," he said.
Paul emphasized Monday that he was not saying the territory would be unable to sell bonds but that selling them would worsen an already difficult situation, making an eventual restructuring that much more likely.
"I think that the government is in a very tough situation with the liabilities related to the pension system," Paul said.
"The pension system is essentially a part of the government. If the pension system collapses, those obligations simply revert to the general fund. They don’t go away." he said.
TheUSVI economy has lost some of its largest employers, reducing the tax base. If the refinery reopened at a similar level to before its closure, that could help lessen the problem, he said.
Paul said his comments to Debtwire were "in the context of hedge funds as purchasers of the bonds." A restructuring would probably require debt-holders to take a "haircut," or a reduction in their yield, but "hedge funds generally are less willing to do that," he said.
"The difficulty is, if restructuring is needed, it becomes much more difficult depending on who the buyers are," Paul said.
The territory has put together a five-year plan to address the structural deficit "that hopefully will be successful," Paul said. But the pension liability remains a major problem for long-term solvency.
"I don’t believe the resources exist locally to address the problem without Congress’ participation," he said.
In September, Finance Commissioner Valdamier Collens and other members of the Mapp administration introduced a draft of the five-year deficit reduction plan to the Legislature, with increased taxes on tobacco, alcohol and soda, changes to property tax exemptions and other revenue generating measures, alongside budget cuts and economic development efforts. Collens said economic development alone accounts for $428 million, or 51 percent of the total of $837 million in projected improvement in the government’s fiscal position, over the five years of the plan. Tax increases, improved collections and austerity account for the remaining 49 percent. Collens said about $255 million of that $428 million is to come from growth in the territory’s tax benefit programs, which offer extremely low tax rates to companies, often financial firms, that set up an office and hire some employees in the territory. Another $173 million – or about $35 million per year, would need to come from other forms of "economic development that are not fully specified in the draft plan.
Mapp has called a special session of the Legislature for Tuesday to consider legislation enacting some of the tax increases and other measures that are part of the five-year deficit reduction plan.
Calls to Collens and emails to Government House Monday morning requesting comment had not been returned as of 10 p.m. Monday.