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TRANSCRIPT
DEBTWIRE BROADCAST
UNITED STATES VIRGIN ISLANDS
Debtwire Municipals discusses credit developments for the USVI following Hurricanes Irma and Maria
CONTRIBUTORS
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1. Seth Brumby, Deputy Editor, [email protected]
2. Xavira Neggers Crescioni, Senior Reporter, [email protected]
3. Greg Clark, Head of Research [email protected]
4. Simone Baribeau, Senior Reporter, [email protected]
WHERE THINGS STAND
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Economy weakened with the loss of major employer
Uncertain market access over the past 12 months
Budget had liquidity problems prior to hurricanes • Hurricane Irma, Category 5 – landfall on 6 September
• Hurricane Maria, Category 5 – landfall in Caribbean on 18 September
Hurricanes have negatively affected the island’s finances
Federal assistance though authorized, not yet finalized
Bond prices have fallen in recent weeks
FEDERAL TESTIMONY ON 13 NOVEMBER
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House Committee on Natural Resources
Senate Committee on Energy and Natural Resources
Governor Kenneth Mapp• Asks for USD 7.5bn in federal assistance, up from USD 5.5bn
• Rebuild of water and power authority (WAPA) better than pre-hurricane
Congresswoman Stacey Plaskett• USVI should have equal treatment as the states
• Lack of parity funding affects finances and preparedness
• Looking for another USD 100m in rum cover over payments
Committee Response• USVI requires independent oversight of federal funds
• Such oversight is not yet known; currently no oversight board
ECONOMIC BACKDROP
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Economic Indicators• Real GDP: down 31% between 2007 and 2015 spurred by Hovensa closure
• Unemployment: 10% in July 2017
• Population: down 5% since 2000
• Debt per capita: approximately USD 19,000 in tax supported debt
Major Industry• Rum
Cruzan and Diageo
USD 13.25 per gallon in rum cover over payments
• Tourism
Cruise ships
GOVERNMENT FINANCES - HIGHLIGHTS
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Status quo deficits• The government would run USD 130m in annual deficits through FY21 (fiscal year begins 1
October); total accumulated structural deficit of USD 650m
• Projected FY17 deficit does not include USD 300m in payments to its public pension fund
• Owed 6m to USVI Waste Management Authority
• USD 25m for operating expenses for two government hospitals
Revenue in FY16• Total revenue was USD 1.49bn; total expenses of USD 1.51bn
• General fund revenue was USD 896m; USD 1bn in expenses; deficit of USD 111m
Debt• USD 3bn in unfunded pensions
• USD 2.3bn in total bond debt
FY16 Disclaimer of opinion
GOVERNMENT’S FIVE-YEAR PLAN
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Mapp’s five-year plan: • update property tax assessments;
• hire more tax examiners to reduce evasions (now 15% to 20%);
• increase hotel and timeshare occupancy taxes, including time-share units;
• increase sin taxes on tobacco.
• Other initiatives such as applying a 5% gross receipts tax to online retailers and getting Airbnb to withhold taxes.
The plan included a 25 year agreement with Limetree Bay to acquire the Hovensa facility:• Resulted in a one-time payment of USD 220m
prevented the USVI from having to tap the market for liquidity during the first two years of Mapp’s administration
• Limetree is making annual fixed payments to the government (USD 4m annually in FY16 and will increase to USD 7m annually.)
CAPITAL STRUCTURE
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Tax-backed bonds and loans• Matching Fund (rum tax) bonds – USD 1.2bn
• Gross receipts tax bonds - USD 722m
• Loans payable from gross receipts, property, and other taxes – USD 30m
Enterprise-backed bonds and loans• Water and Power Authority – electric revenue bonds and notes – USD 289m
• Port Authority – marine revenue bonds – USD 45m
• Loans payable from electric, water, and port revenues – USD 70m
Other bonded debt• Tobacco bonds - USD 15m
• Grant anticipation revenue bonds - USD 85m
CAPITAL STRUCTURE (continued)
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Senior-subordinate splits• Matching Fund (rum tax) bonds – USD 673m senior, USD 155m subordinate lien, USD 273m
subordinate revenue (Diageo and Cruzan bonds)
• Gross receipts tax bonds – no split
• Tobacco bonds – USD 7.8m senior (series 2001), USD 7.3m subordinate (series 2006)
• Water and Power Authority – electric revenue bonds and notes – USD 140m senior, USD 100m subordinate, USD 49 BANs
Rating agency actions• In 2009, senior lien Matching Fund bonds were rated Baa2/BBB/BBB
• A year ago, ratings were B1/BB/BB, all with negative outlooks
• Current ratings are Caa1/NR/NR. Moody’s rating is under review with “direction uncertain”
Investor website• www.usvipfainvestorrelations.com
LIQUIDITY AND MARKET ACCESS
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Early December 2016 tried to tap the market FOR USD 222m
Postponed sale to January 2017 as concerns over fiscal situation mount USD 147m was for operational capital
Market sought high interest rates
Greater security for permanent transfer of rum taxes to a trustee
January 2017 USVI nixes plans to access market for the foreseeable future, planned to rely by on private financing. These included:
USD 40m in revenue anticipation notes
USD 14.8m Water and Power Authority revenue bond anticipation notes
Failed sale Fitch and S&P Global downgrade again over concerns with USVI’s access to market capital
HURRICANES’ EFFECT ON ECONOMY
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Governor Kenneth Mapp informed Congress (12 October letter) that USD 5.5bn in disaster aid would help address USVI residents' most vital needs. Requested the following:• Government, Public Sector and Housing Needs USD 4.7bn
• Governmental Financial and Revenue Losses USD 800m
Mapp has also issued following lost estimates:• tourism and key industry loss USD 2bn
• commercial facilities’ losses at USD 500m
USD 223m in expedited rum tax rebates• USVI can use only 8% of these funds, as USD 175m, are earmarked for debt service on
the territory’s matching fund, or general revenue tax, bonds for FY18
HURRICANES’ EFFECT ON BUDGET AND LIQUIDITY
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USVI FY18 budget deficit could more than quadruple to USD 325m from USD 80.9m
Prior to storms FY18 budget projected USD 833.9m in general fund revenues and USD 914.8m in expenses
Government Employee Retirement System suffered a 93% revenue decline in September (USD 950,360) compared with September 2016 (USD 13m). (Virgin Islands Daily News)
USVI OMB Director Nellon Bowry noted budget gaps will also persist in FY19 and FY20
RUM AND TOURISM
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Tourism, trade, and other services account for nearly 60% of the Virgin Island's GDP • Accounts for about half of total civilian employment
• Approximately 2m tourist visits per year; Rum shipments for six months in FY16 totaled 8.136 bn proof gallons
Tourism• The USVI’s department of tourism said this week that it is working to announce the return
of cruise traffic in the coming months;
• various hotels won’t open until 2018/2019
Cruzan/Diageo (no supply disruptions expected)• The Cruzan Rum distillery in St. Croix resumed production 16 October
• Diageo facility impacted, expects to be fully operational upcoming weeks
DISASTER RELIEF AND FEDERAL FUNDING
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Advanced cover-over payments
• Federal government advanced USD 223m
• USD 175m debt service
• USD 30m to rum producers
• USD 18m for general fund
New Debt
• USD 800m in disaster relief loans
• USD 450m for central government
• USD 350m for component units (WAPA, Port Authority, etc)
• 21 November, USVI lawmakers will vote on loan terms for USD 421m tranche
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