New target on pension obligation bond: $120M

The CNMI government is targeting to float a higher pension obligation bond amount after analysis of the government’s financials showed that it can handle repaying a higher debt ceiling.

From last month’s target of $80 million, the Commonwealth Development Authority officials disclosed yesterday that the administration is now considering floating $120 million.

CDA executive director Manuel Sablan and the agency’s legal counsel, Vicente Salas, disclosed this during yesterday’s board meeting, saying the new target amount was reached after the agency’s review of the financial position of the CNMI.

Work is now being done to enact legislation that will amend both the CDA Act and POB Act to authorize the use of gross receipt taxes as pledge to the debt service. Another bill would prevent the enactment of future laws that would infringe on the gross receipt taxes, which could jeopardize the repayment of the bond.

Both bills are expected to be acted on by the Legislature soon, according to the two CDA officials.

Salas said all these amendments are part of efforts to make the bond issue more marketable. And in order to be marketable, the CNMI has to get an investment grade rating of at least BBB.

“Based on our review of the financial position of CNMI, it appears that we could float $120 million bond, assuming we can achieve investment grade rating,” said Sablan.

Besides the desired investment rating, the CNMI’s good history in servicing previous bonds is a plus factor for the new POB. Salas pointed out that the CNMI has never been defaulted in servicing two existing bonds, which amount to $8 million annually.

“We have a very good history with respect to repayment of previous bond issues. That’s positive factor in marketing issue. But again, they’re looking at repayment of the bond. By structuring it this way [dedicating gross receipt taxes] we can assure potential bond holders of repayment,” said Salas.

He described the mechanism of pledging gross receipt taxes as unique but workable for the Commonwealth.

Salas said the CNMI’s projected gross receipt taxes, which will be placed in a special account, is sufficient to service the planned $120 million POB. It was disclosed that because the POB is not a tax-exempt bond, it would carry a higher interest rate than what the CNMI has been used to in the past.

Once legislation is passed amending the POB Act and CDA Act, completing the bond indenture agreement will be the next. At present, the agreement is in its third draft and awaiting passage of the bills to incorporate in the agreement.

It will be the CNMI’s first time to float a pension obligation bond.