Bonds

Pension deal buys time for U.S. Virgin Islands: Moody’s

The U.S. Virgin Islands’ recent bond refinancing will help it avert financial catastrophe for the short term but it is not necessarily a longer-term fix, according to Moody’s Investors Service.

The U.S. Virgin Islands’ government refinanced nearly $1 billion of its matching fund bonds in late March by creating a Matching Fund Special Purpose Securitization Corporation and selling the matching fund revenues to the entity. Bondholders got first lien on these revenues and after payments are made to the bondholders and certain rum producers, most of the rest of the money is to go to the Government Employers Retirement System. 

Moody’s had projected the system would run out of money sometime from Oct. 1, 2024, to Sept. 30, 2025. “A pay-go scenario [for the pensions] would likely trigger a restructuring by the USVI due to unaffordable pension costs,” Moody’s Senior Credit Officer Thomas Aaron said.

Moody’s Investors Service says a recent matching funds bond sale was a credit positive for the U.S. Virgin Islands.

Bloomberg News

Because the deal gives the pension system a subordinate lien on the matching fund revenue stream and because there is capitalized interest for three years, the deal is a “credit positive” for the government, Aaron said.

“We project that the bond transaction has extended GERS’ solvency into at least the 2030s based on several key assumptions, such as GERS’ 4% assumed rate of investment return, stable matching fund revenues, and continued direction of matching fund revenues to payments of the GERS funding note on top of the USVI’s base statutory contributions,” he said.

Moody’s rates the government Caa3 with a stable outlook. 

“Whether the government’s statutory contributions plus dedicated matching fund revenues will be sufficient to maintain the retirement system’s solvency will depend not only on the performance of matching fund revenues, but also on the retirement system’s investment returns,” Aaron said. 

Aaron noted the local government had received $43 million of matching fund revenues in fiscal 2021 for its General Fund and additional matching fund money for capital projects. In the new arrangement, the local government will not get this money in the near term and little, if any of it, in the long term. This will add financial stress to the government, he said.

“The official statement for the 2022 bonds warns that parties involved in a hypothetical USVI restructuring, including the government itself, could take the position that the assets and liabilities of the Securitization Corporation should be consolidated with the government as the debtor,” Aaron said. “In the event a court agrees with that position, then the holders of the 2022 bonds could be among the creditors of a USVI restructuring despite the securitization structure.”

The transaction is unlikely to prevent a future debt restructuring, Municipal Market Analytics Managing Director Lisa Washington wrote in a report, but she said it reduces the risk over the medium-term.

“Concerns related to the transaction’s durability — related specifically to the USVI — include the U.S. government’s ability to manage/interfere with the affairs of its territories, its strained fiscal condition, exposure to significant climate-related hazards, and the size of the revenue stream pledged and related debt,” Washington wrote.

John Hallacy, president of John Hallacy Consulting, said there are “a lot of moving parts in this financing.”

Hallacy said one aspect to the deal is that there are three years of capitalized interest to consider.

“It would be a very rare circumstance to be upgraded during such a period,” he said. “Real consideration would be after the capitalized interest period to see how the revenue flows actually work out.

“Moody’s has always been very circumspect of investment earnings assumptions,” Hallacy continued. “They are probably shocked that Warren Buffet’s fund returned 8% in the first quarter. A junior lien on the tax also has a somewhat higher risk. As for the structure, it should hold up except for the most dire scenario. Assuming the revenue flows work reasonably well, an investment grade determination is certainly a possibility in the future.”

Joseph Krist, publisher of Muni Credit News, said, “The move to refinance the retirement system is clearly a positive relative to no action. Nevertheless, the underlying economic problems continue and the infrastructure problems especially at the water and power authority continue to be a drag on economic improvement. Moody’s was right to hold the rating until more sustainable trends can be established especially in light of the redirection of rum tax revenues away from general revenues.”

A spokesman for the U.S. Virgin Islands governor and the chief administrative officer for the USVI Public Finance Authority did not immediately respond to a request for a comment.

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