ST. CROIX — The Matching Fund Special Purpose Securitization Corporation will capture incrementally more earnings in its capitalized interest fund proceeds to meet debt service of bonds due to increases in rates, according to information provided today to the corporation’s board.
The MFSPSC is a special type of corporate entity separate from the government that the Legislature authorized with the passage of Bill No. 34-0188 (Act No. 8540) to issue bonds on rum tax revenues that permitted refinancing on more favorable terms at current interest rates.
Known as a Public Finance Authority bond restructuring bill, the legislation was enacted on February 8, 2022 to reduce a portion of the government’s debt and bring solvency to the Government Employees’ Retirement System by providing between $82 million to $158 million in annual contributions to the pension system, totaling about $4 billion over 30 years. The annual payments are due on October 1.
Governor Albert Bryan Jr. chaired the corporation’s quarterly meeting held today via Zoom. The other board members are Michelle Dreyer, secretary; Sheila Robinson, treasurer; Pamela Gregorski; and Kristine Eppes. The board members heard a presentation on the corporation’s capitalized interest account by Dino Zepcan and Andrew Mathes, of Causey Demgen and Moore PC, a registered investment advisory firm based in Denver that has been investing the capitalized interest fund proceeds on behalf of the MFSPSC.
Additionally, the board approved three resolutions relating to contracts for audit services and liability insurance, as well as for reimbursement of outstanding invoices owed to the PFA.
Causey Demgen and Moore PC has been investing the capitalized interest fund proceeds on behalf of the corporation.
When the corporation engaged the investment advisory firm in May 2022 and the firm was looking to deploy the funds into an investment, Zepcan said the proposed anticipated yield at the time through a portfolio of securities was about 2.25%. He said the firm has been working toward increasing that yield and being able to materially capture more earnings than it would have had the 2.25% been locked into just a portfolio.
“The point from where we were in May of 2022 to where we are now is a completely increased rate environment from where we were, and again, why we were brought in to manage these funds as they pertain to the capitalized interest account was to be able to take advantage of that movement and not lock in a lower-yielding portfolio at the time,” Zepcan said.
Mathes discussed how the territory has benefited from the increased rates.
“The market’s lined up more with what we anticipated was gonna happen, and specifically for these assets for the VI, we have taken advantage of the increases in rates during this time period, and that’s helped us capture incrementally more earnings that are gonna be available,” he said, noting it will result in extra cash flow that will reduce the amount of assets that must be pulled to meet the debt service of the bonds.
Mathes said the market has aligned with his firm’s view, resulting in earnings being incrementally added. He said the account will be completed and all the funds will be released after the October 1 payment.
“We’re really happy that the results have been incrementally exceedingly positive with ultra-safe, low-risk investments,” he said. “If you hadn’t engaged us to do this, we’d be sort of behind by well over $1 million in earnings if it would have just been put into a treasury portfolio.”
The financial advisors reported that the portfolio performance of the capitalized interest fund anticipates earnings of about $5.1 million at an approximate yield of 3.05% due to anticipated stronger growth, slightly higher inflation, and lower employment rate, according to a news release.
Discussing the outlook for the next six months leading up to the October 1 annual payment due date, Mathes said he doesn’t expect that interest rates would be materially lower.
“I think we’ve held off the idea of a recession,” he said.
Mathes noted the stock market was up more than 10% for the first quarter of the year. He said, however, now is a painful time for people who don’t have a lot of money. He said he anticipates some additional spending programs from the government before the general election in November. He said an additional spending program that gets tied to aid to Ukraine and building a new bridge in Baltimore would not help the Federal Reserve System’s cause of lowering rates.
“That’s been our view and that’s been beneficial for our investment strategy on your behalf because that’s been why we’ve been rolling lots of six-month maturities, staying where the yield’s highest on the front of the curve,” he said.
After hearing the presentation on the capitalized interest account, the board approved three resolutions.
The board approved a resolution authorizing the PFA to amend and extend the contract by two months with BDO, USA LLP to provide audit services on behalf of the MFSPSC. The extension will be until April 30.
The board approved a resolution authorizing the PFA to enter a contract with ACE American Insurance Company (a Chubb USA company) on behalf of the MFSPSC for the renewal of the corporation’s liability insurance coverage for directors and officers. The coverage remains the same of $1 million per claim, with a $10,000 deductible. The premium increased to $4,996 from $4,135.
The board approved a resolution for the reimbursement of outstanding invoices of $47,984.80 that the MFSPSC owes the PFA for expenses paid on the corporation’s behalf.
