Recently the Bryan-Roach administration announced a plan to securitize Virgin Islands Rum Cover Over Matching Funds. While the proposed structure at first glance seems complex, it is in effect an elegant solution for the Government of the Virgin Islands (GVI) to reduce borrowing costs and participate in what is historically the lowest global interest rate environment in history, while also reducing its liabilities. How is this possible?
To spur economic development in the U.S. Virgin Islands, the federal government has historically given the GVI a percentage of the excise tax collected from the sale of rum which was distilled in the U.S. Virgin Islands. Currently, the GVI benefits $13.25 per proof gallon of rum distilled in the USVI which is sold throughout the rest of the USA. This revenue stream is an asset of the territory.
The governor’s proposal is essentially to allow for the formation of a new and independent bankruptcy-remote Special Purpose Vehicle (SPV), which will purchase this revenue stream for 20 years, the term of the bonds which will be issued by the SPV. The proceeds of the sale of the rum cover over revenues to the SPV will be used by GVI to pay off its existing $1.005 billion in bonds which currently have an average interest rate of 5.58 percent. The SPV will fund the purchase of this revenue stream by raising capital from a pool of investors as an investment-grade rated entity; thereby, having a significantly lower projected borrowing cost than the GVI, anticipated to be approximately 3.5 percent. The SPV will serve as a lockbox, remote from obligations other than paying its bondholders and then disbursing additional savings to GVI and the rum producers.
The savings to GVI, which will be unlocked by proceeding with this strategy, is expected to be approximately $85 million per year for each of the first four years. To put this savings into perspective, $85,000,000 of savings would be enough to fund the 2020 budgets of V.I. Waste Management Authority, Department of Health, Office of the Governor and Legislature combined.
My strong suggestion is that at least half of these savings for the first two years should be directed towards the GVI’s compulsory contribution to access pre-approved federal grants for hurricane recovery from 2017. The V.I. has approximately $2 billion in grants, which we can access if we provide a 10 percent matching contribution. For example, by contributing $85 million dollars funded by the savings of this securitization, the GVI would be able to unlock $850,000,000 of free federal grants, which could be deployed into the Virgin Islands economy in short order.
This proposed securitization is the type of creative thinking and structuring that needs to be embraced quickly to address the territory’s budget shortfalls and solvency issues. To quote the former General Electric CEO Jack Welch, “If you’re stagnant you’re dead.” I implore the Legislature to put politics aside and act on behalf of the territory.
Editor’s note: Virgin Islander Conn Davis II is a licensed investment banker and entrepreneur.