Behind U.S.V.I. plan to convert federal loan into matching funds bond

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The U.S. Virgin Islands plans to convert a recent U.S. Treasury loan into a matching fund bond payable to the federal Treasury.

The plan is the territory's latest step to recover from the effects of two very strong hurricanes in September. Even before the hurricanes the government was struggling financially and its debt had been downgraded deep into speculative territory.

The Virgin Islands central government and Water and Power Authority owe a total of more than $2 billion.

After the hurricanes the government applied to the federal government for a Community Disaster Loan to pay some of its operating expenses.

The federal government approved $296 million for the loan in November. It initially requested that the loan be in the form of a gross receipts tax bond, according to Virgin Islands government spokesman Lonnie Soury.

“Based upon the USVI’s inability to meet the additional bonds test under the gross receipts tax indenture, the federal government agreed to a loan of $85 million,” he said.

In January the U.S. Treasury disbursed the loan.

The two sides have just started talks on the next step and their plans are preliminary. In these plans the Virgin Islands would create a matching funds (rum tax) bond to be sold to the U.S. Treasury.

The bond would be for $211 million, Soury said. However, since the territory owes the Treasury $85 million, the Treasury would just disburse $126 million to the territory, while paying off the outstanding loan.

After the transaction the territory will have $211 million due to the U.S. Treasury, all of it as a matching fund bond. The new bond would have the same payment priority as the government’s outstanding senior bonds, Soury said.

According to Soury, the territory's government might later apply for a further $85 million loan, which would probably be securitized as either a matching fund or gross receipts tax bond.

In the federal disaster recovery law signed this week there is a provision that would allow the Virgin Islands government to potentially borrow a further $250 million beyond the $296 million, Soury said. The government is unsure if it will move beyond borrowing $211 million from the Treasury.

In the bill the rum tax cover-over was extended for five years. It was set at $13.25 retroactively to Jan. 1, 2017 and forward to Jan. 1, 2022. This is the basis for the matching fund bonds.

The Virgin Islands government expects the full $7.5 billion in aid it has requested, Soury said.

The new measure allocates $2 billion for the repair and reconstruction of the electrical system of Puerto Rico and the Virgin Islands. The measure “enables USVI to qualify for full funding to completely rebuild three hospital centers,” Soury said.

The islands will get federal Medicaid funding of $142 million over two years with the normal local government funding match waived. The islands’ government also expects a substantial amount for the repair and rebuilding of its schools.

In other Virgin Islands news, on Jan. 31 Moody’s Investors Service downgraded the islands’ senior matching fund bonds to Caa2 from Caa1, subordinate matching fund bonds to Caa3 from Caa1, and third-lien Diageo and Cruzan matching fund bonds to Caa3 from Caa2. Moody’s has a negative outlook on the ratings. Moody’s doesn’t rate the gross receipts tax bonds.

In the last twelve months Fitch and S&P Global Ratings have both withdrawn their ratings of the Virgin Islands.

On Feb. 2 the Virgin Islands Water and Power Authority posted a notice to the Municipal Securities Rulemaking Board's EMMA website, saying that it has continued to make its bond payments and sinking fund deposits, without drawing on bond reserves, since the hurricanes.

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Speculative grade bonds Hurricane Irma Hurricane Maria Virgin Islands Public Finance Authority Government of the Virgin Islands Virgin Islands Water and Power Authority U.S. Virgin Islands