POB effort begins; financial adviser selected

The Commonwealth has settled on a federally required financial adviser to guide and package a $30-million pension obligation bond that Gov. Eloy S. Inos aims to float through the Commonwealth Development Authority.

According to administration and CDA officials, the bond flotation aims to ease the impact the millions of dollars in annual payments to the Settlement Fund has on government revenues and public service programs.

For fiscal year 2015, some $27 million was paid out of government appropriations to meet the minimum annual payments sufficient to allow the Fund to pay 75 percent of class members’ full benefits. In fiscal year 2016, the government projects to pay out a total of $30 million to meet this obligation.

These figures are a major chunk of projected revenues for allocation for those two fiscal years, at $134.33 million and $145.8 million, respectively.

BLX Group—the group that offered the lowest price and had background knowledge of the CNMI as the adviser on CDA’s financial disclosure statements for existing bonds—has been selected as the financial advisor, CDA executive director Manuel Sablan disclosed yesterday. The U.S. Securities and Exchange Commission requires any bond issuer to retain a financial adviser. BLX group signed a contract about two weeks ago.

With the financial adviser now on board, CDA is able “to formally move to float a bond,” Sablan said.

The administration and CDA have been in talks since April on how to move forward with the bond.

“The administration has tasked CDA to begin exploring the possibility of us floating at least a $30- to $31-million pension obligation bond,” Sablan said in an earlier interview. “We need a number of key players: an underwriter, bond counsel, bond trustee and most importantly” a financial adviser pursuant to federal requirements that any bond issuer would have to retain a financial adviser.

CDA and the administration will now need to complete a “preliminary official statement,”—described by officials as a comprehensive document that would spell out the purpose, the condition, and the security of the bond. The document will help the CDA package the bond and put it out to market, and will give prospective buyers a comprehensive picture of the financial viability of the issuer—in this case, the CNMI—in meeting the bond payments and other requirements.

During a Cabinet meeting Monday, press secretary Ivan Blanco said that acting governor Ralph DLG Torres asked department heads and agencies to give whatever assistance they could to CDA if asked. CDA would need information from the departments of Finance and Public Lands, Marianas Visitors Authority, and the CIP Office, among others, Saipan Tribune learned, to show how business gross revenue tax has been collected, or how much BGRT has been collected over the last 10 years, for example.

Position statement

“The numbers have not been settled yet. The rates, the whole shebang, the structuring of the bond, the terms—those things are in the making,” Sablan said yesterday. “We are trying to complete what they call a preliminary official statement—part of required documentation that has to prepared and filed.”

The statement would cover the “whole geography, the economy, the whole shebang,” Sablan said.

If they succeed in marketing the bond, the prospective buyer must be presented with this information to ensure “you know what you are buying,” Sablan explained.

He said some of the economic information needed is business gross revenue tax information, audited financial statements of previous years, and previous government budgets.

“We are trying to go as far back as five or 10 years to provide a trend, to show where we are going, and where we are, to provide some kind of perspective going forward.”

He said there were a numbers of benchmarks to go through. “What is the percentage of the proposed debt service [or] annual debt service to the annual general revenue funds collected? The bigger the coverage, the better the situation. Those are the type of things that would come out of this informational package.”

Sablan explained they would have to provide a track record for payments on existing bonds, “whether we have been delayed or delinquent,” but he noted that CDA has been meeting its obligations.

He said they aim to create a least possible cost to the CNMI with the bond, with reasonable rates, and terms to allow for repayment, as well as terms—in the event the economy substantially improves and the revenue base increase—to also have the option to pay off this loan in advance of its maturity.

Sablan said they would need more evaluation as they go through the numbers. “Any time you access the market you deal with interest,” he said. “The cost to the borrower is reflected in the interest you pay on that borrowing. From the bondholder’s perspective, it’s the yield…from our perspective, it’s the cost that you have to incur.”

At some point, CDA will make a determination on what is feasible, or “what we can basically support without further getting us into a financial bind,” he added.

Need for bond

On the need for the bond, Sablan said “there is still a need for additional cash to meet some of the shortfalls” in government revenue, noting that a major chunk of the CNMI revenue goes into the Settlement Fund.

“And that cash flow was unanticipated,” he added. “When they entered into the Settlement Fund arrangement, a decision was made for a certain amount of money every year from 2014 fiscal year going forward and the chunk of the money is rather substantial.”

“In addition to the CNMI government making payments to the Settlement Fund for a minimum of the amount specified under the settlement agreement, they also have to appropriate money to maintain and provide continuing coverage under the health insurance,” he said. “It’s in the book that we owe them. But from the cash flow perspective, it’s something that cropped up but has to be paid. So that created a cash flow pressure on the government. So what you do when you have that pressure is you try to relieve that pressure by going into some kind of debt borrowing but make sure that it does not further get you into more financial quagmires,” he said.