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V.I. Bond Sale Delayed As Investors Request More Time

The bond pricing and order period for $247 million worth of new V.I. government bond debt, being offered to help balance this year’s budget, opened Wednesday, but investors requested more time to consider the sale.

In late 2016, the Legislature authorized the Public Finance Authority to borrow $247 million to keep the government running. That includes $116 million to fill this year’s budget deficit and pay government operating expenses for the current fiscal year; $100 million to the Government Employees Retirement System; and the rest for the V.I. Waste Management Authority and partial payment on past due utility bills.

The same bill included a "statutory lien" on gross receipts tax revenues and federal alcohol excise tax revenues remitted to the territory, aimed at increasing the security for lenders. The V.I. government will put local gross receipts tax revenues under the power of a special, bank-appointed trustee and federal excise tax revenues will go directly to the trustee, to pay off interest and principal on V.I. bonds, before any remaining funds will go to the territory’s coffers.

The territory’s growing reliance on debt to pay current expenses, and the federal intervention in neighboring Puerto Rico’s debt crisis have both affected borrowers perceptions of V.I. creditworthiness, leading all three major bond rating companies to downgrade U.S. Virgin Islands debt, increasing the likely cost of borrowing. The statutory lien provision is aimed at reassuring investors, to make it easier to sell bonds at a better interest rate and price.

“Without the grant of the requested statutory liens, the Fitch Rating will be lowered two notches to B plus and the marketability of such bonds by the underwriter will be in serious jeopardy," Public Finance Authority Executive Director Valdamier Collens told the Legislature in November.

Wednesday, Andre Wright of Standard International Group, a financial advisor to the Public Finance Authority, confirmed the order period had begun and investors wanted more time.

"Yes the bond pricing/order period occurred today and investors have requested more time in order for us to reach a sale," Wright said in an email.

Collens could not be reached for comment.

The PFA originally planned the bond sale for late 2016, but the PFA postponed it until January.

In December, Wright said the government "decided to postpone the transaction until next month, partially due to market conditions. 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.

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. Wright disputed that notion in December, saying the high-yield and tax free status of V.I. bonds make them desirable.

"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 Northern Mariana Islands and the U.S. Virgin Islands, can issue triple tax exempt bonds, 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.

Also in December, Gov. Kenneth Mapp called a special session, proposing several tax increases, primarily on alcohol, tobacco and time share rentals, as part of a proposed five-year plan to reduce V.I. government deficits to a more manageable level. Senators rejected the tax increases for the time being, saying they wanted to get more input from affected businesses before acting. Hearings may be scheduled in the near future.

At the December hearing, Collens said the territory had delayed until January a bond sale to cover operating expenses and the territory needed to show potential lenders that it was serious about addressing its deficit, urging quick passage of the tax increases.

"Any delay will be seen as inaction," Collens said at the time.

Without any action, the government is facing ongoing deficits averaging $170 million per year in a locally funded budget of about $850 million. With all the proposed measures, including budget cuts and big hoped-for increases in the territory’s Economic Development Authority tax break programs, the Mapp administration projects it can reduce the deficit to around $56 million per year by 2021.

The longer it takes to sell the bonds, the more difficult the government’s short-term cash flow situation is likely to be, as the borrowing is largely devoted to filling the gap between this year’s projected revenues and expenses. In December, Collens said the government had about seven days worth of cash on hand and that "is not a very good financial position to be in." But tax revenues continue to come in, and the territory may have as much as $40 million remaining in a revolving line of credit designed to smooth out cash flow issues, so the government is not in immediate danger of not being able to pay its bills.

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