The V.I. government hasn’t given up on refinancing about $1 billion in public debt and the Public Finance Authority is authorizing millions of dollars in contingency fees and contracts to make it happen.
If the bond sale goes through, outside advisers and the senior underwriter stand to collect nearly $9 million in fees for their part in Gov. Albert Bryan Jr.’s plan to refinance the territory’s debt through a newly created “special purpose vehicle.”
While the “matching fund revenue securitization” stalled Sept. 28 despite a flurry of activity in the Senate to pass enabling legislation, Bryan said he intends to bring a new plan to lawmakers after the November election.
During Thursday’s Public Finance Authority board meeting, Bryan said five contracts ratified Sept. 23, before the sale stalled, remain active.
Three of the five contracts are for contingency fee agreements, which PFA legal counsel Kye Walker said would only be paid upon closing, and payments would come “from the bond proceeds.”
The board voted unanimously to pay the law firm of Squire Patton Boggs a contingency fee not to exceed $2 million, and to pay the law firm of Duane Morris a maximum of $500,000 for services related to the fund.
The third agreement is with senior underwriter Samuel A. Ramirez & Co., Inc., which will receive a contingency fee of “0.625% of the par amount of any bond issued payable by the SPV upon a successful closing,” according to Walker.
Par value is the face value of a bond, the amount the government promises to repay bondholders when the bond reaches maturity.
Bryan’s initial plan sought to refinance and restructure about $1 billion of bond debt secured by rum cover-over revenues that the Virgin Islands receives from the U.S. Treasury based on excise taxes paid on Virgin Islands produced rum.
Ultimately, the par value of the bond sale will depend on how much debt the V.I. government elects to sell and the interest rate investors are willing to pay on that debt. But, assuming that the par value ends up being $1 billion, Samuel A. Ramirez & Co. would collect a fee of $6.25 million for underwriting the bond sale.
Why create a special purpose vehicle
A special purpose vehicle would take full control of the cover-over monies. Being independent and untarnished by the V.I. government’s poor financial standing, the vehicle would purportedly attract more investors in the bond market, allowing the new bonds to fetch lower interest rates than the V.I. government could achieve, around 3.5% as opposed to the current 5.58%-6.75% paid on Public Finance Authority debt.
The new arrangement would reportedly reap $255 million in cash savings over the next three years and delay the insolvency of the Government Employees’ Retirement System.
In addition to the contingency agreements, the PFA board of directors voted unanimously to engage Kroll Bond Rating Agency to perform ratings services associated with the Matching Fund Revenue Securitization. Walker said the contract is worth $145,000.
According to media reports, Kroll recently agreed to pay the U.S. Securities and Exchange Commission $2.01 million, primarily in fines, to settle civil charges that some of its ratings practices were inadequate. According to the SEC, the fines were related to ratings for commercial mortgage-backed securities and collateralized loan obligation combination notes.
The PFA also voted to enter into a $185,000 contract with IHS Global “to verify and project the USVI Matching Fund revenues from rum shipments to the United States and to issue a report in connection with the Matching Fund Revenue Securitization.”
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The complex plan has been difficult to grasp for many not intimately familiar with bond transactions, and Walker clarified Friday that “the initial issuance costs for the new bonds would have been funded with proceeds from the proposed new bond issuance and the SPV’s ongoing limited operations would have been funded from the Matching Fund Receipts. The proceeds of the new bonds would not have been property of the people of the Virgin Islands but rather would have been the moneys that would have been paid by investors to purchase the proposed new bonds.”
Residual receipts left over after the payment on the new bonds, “including the significant savings that would have been derived from this transaction, would have been the property of the people of the Virgin Islands,” Walker said. “The Matching Fund Receipts are not generated from Virgin Islands taxpayers but rather are derived from a Federal excise tax imposed on rum exported to the US mainland.”
Walker also clarified that unlike the PFA, for example, which is a partially taxpayer-funded “extension of the government with a board that consists of members of the government’s financial team,” that “was created to assist the government in the performance of its fiscal duties with a broader scope of duties,” the SPV as envisioned had a far different statutory function.
The SPV’s structure “was more similar to the Tobacco Settlement Financing Corporation which was created for the very limited purpose of purchasing all of the government’s rights, title, and interest in certain payments received and to be received by the government under the Master Tobacco Settlement Agreement and to issue bonds and the residual bond to pay the purchase price of those revenues,” Walker said. “The SPV would have done the same with the matching fund receipts and, likewise, would have served a very limited purpose.”