Virgin Islands cancels $1B deal due to lawsuit, cap on interest rates
The U.S. Virgin Islands said Monday it was canceling a planned $1 billion bond refunding.
Governor Albert Bryan Jr. said the cancellation was because of the “negative impact” of a lawsuit filed against it on the eve of bond pricing as well as amendments made by the Virgin Islands Senate on the bond legislation. The latter issue was reference at least partially to the Senate’s vote to limit interest rate to no more than 3.75%.
For a comparison, when Illinois, rated Baa3 by Moody's Investor's Service and BBB-minus by S&P Global Ratings and Fitch Ratings, borrowed from the Fed's Municipal Liquidity Facility in June, it had to pay 3.82%. The difference is that was for a one-year borrowing and the Virgin Islands was planning to pay the new bond off through 2039, a near 20-year bond
Senate Finance Committee Chairman Kurt Vialet said he thought the whole issue was with the 3.75% cap. He said when the representative of the underwriter, Ramirez & Co., had spoken to the Senate he had told the senators that the sale could be made at 3.75%.
The existing matching fund bonds have an average rate of 5.58%, Vialet said. Vialet said he heard when the proposed refunding, using a special purpose vehicle, went to the market, the underwriter found a 4.48% interest rate would have been needed to complete the deal. The higher interest rate would have cut the already slim savings associated with the deal, he said.
Vialet said the Senate has always put limits on the interest rates of offered bonds.
“I will work with our financial and legal advisory teams and the legislature with increased vigor to develop alternative options to try to gain an equivalent amount of savings that can be applied to the same projects within a short timeframe," Bryan said.
Vialet said he didn’t like the structure of the bond in that the savings were near-term and substantial relative losses (compared to the existing bonds) were further out. “I don’t like to kick the can down the road.”
One investor who holds no position in the Virgin Islands central government bonds said the governor had got ahead of himself. He said the proposed new bonds were destined to fail because they offered similar interest rates but less liquidity compared to Puerto Rico’s restructured Puerto Rico Sales Tax Corporation (COFINA) bonds.
"Following the governor and senators meeting to address issues with the authorizing legislation, we expect to be back in the market to price these bonds in the coming weeks,” the U.S. Virgin Islands municipal advisor, Richard Tortora, with Capital Market Advisors, said.
Vialet said the government was trying to be frugal to address its financial challenges.
Bryan said that a 40% cut in government pensions loomed in January 2021 if the government didn’t find a way to prevent the pension system from running out of money.
Bryan said the government will make an $85 million bond payment due Thursday.