Interest Rates

After years of historically low interest rates, the substantial increase in interest rates has decreased demand for loans in the residential and commercial loan markets. Many residential borrowers refinanced or obtained new loans when the rates were low. Owners of real property are often reluctant to sell real property and purchase new property if the interest rate on a new loan is substantially higher than their existing mortgage loan.

Regulatory Environment

The United States Virgin Islands (USVI) is a territory of the United States, and federal laws and regulations generally apply in the USVI. Changes in federal laws and regulations impact the USVI in much the same manner as in the United States. The government of the Virgin Islands also passes laws that can affect the direction and trends of the loan market, but it has not passed any new laws in recent years that materially impact the loan market.

Like other jurisdictions, global conflicts can add uncertainty to the general economic environment, which can adversely impact the desire to borrow and lend money. Uncertainty may also result in higher interest rates for loans.

The high-yield market has very little impact in the USVI.

The loan market in the USVI has not seen significant growth in alternative credit providers. The lenders for transactions in the USVI are generally banks and mortgage companies making market rate (or slightly higher) loans.

Banking and finance techniques have seen very little evolution. Banks and mortgage companies generally make traditional residential and commercial loans to borrowers located in the USVI.

ESG or sustainability-linked lending available in the United States is generally also available in the USVI. Because of the USVI’s excellent, sunny weather, solar electricity systems are very popular and financing can be available for the purchase and installation of the systems. 

Persons making mortgage loans who are subject to qualification and licensing requirements will be regulated either as “mortgage lenders”, banks or credit unions. “Mortgage lenders” are, generally speaking, persons or companies making mortgage loans in the USVI who do not qualify as banks or credit unions.

Other than federally chartered lenders, any person “doing business” by making mortgage loans in the USVI will be subject to the qualification and licensing requirements of the Virgin Islands Department of Banking, Insurance and Financial Regulation.

A lender making an isolated loan transaction in the USVI is generally considered not to be “doing business” for purposes of qualification and licensure.

Foreign lenders who qualify and register to do business in the USVI will be subject to the qualification and licensing requirements and procedures of the Virgin Islands Department of Banking, Insurance and Financial Regulation.

Foreign lenders may receive security and guarantees from borrowers located in the USVI.

There are no specific USVI laws imposing restrictions, controls or other concerns regarding foreign currency exchange. United States federal laws and regulations apply.

There are no specific USVI laws restricting the borrower’s use of proceeds from loans or debt securities.

Agent and trust concepts are recognised in the USVI.

Lenders making residential mortgage loans may take advantage of the Mortgage Electronic Registration System. 

Lenders may also assign their interests under loan documents to another person or entity.

Debt buyback by the borrower or sponsor is permitted.

Contrary to some European jurisdictions and to Canada, there are no “certain funds” provisions in USVI law or practice, which means that, as a general rule, a potential acquirer of an entity is not legally required to have “certain funds” or, in other words, fully committed financing in place at the time it makes a public offer to acquire a company.

Nor is there a practice in the USVI of making public filings of any such acquisitions, except when such acquisitions require regulatory approvals or consents in which case public notice in the normal course occurs because of notice of a governmental step or hearing that is a condition precedent of an acquisition.

Financings that involve the government of the United States Virgin Islands (GVI) are arguably an exception to the general rule. When the GVI borrows funds, whether by private activity bonds, municipal bonds, or bonds or notes in anticipation of revenues or taxes, the GVI typically acts through the Virgin Islands Public Finance Authority (PFA), which is the GVI’s finance conduit, and these transactions are approved by the PFA’s Board of Directors, the terms are publicly reported and the underlying financings are handled legally in the same manner as municipal bond financings are handled throughout the USA, including standards of disclosure used in the USA such as adherence to the filing requirements of the Municipal Securities Rulemaking Board/EMMA website.

In certain transactions involving the obtaining of public regulatory approvals of a GVI agency, the applicant can request “confidential treatment” as to the documentation submitted.

By contrast, returning to the issue of standards of documentation used in the USVI as to privately generated acquisition financing, both long-form and short-form documentation are commonly used by the banks financing these transactions, including early-stage documentation such as “indicative term sheets” for more complicated transactions, followed by more commitment letters, with closings on financings scheduled to coincide with the closing on the underlying acquisition. Lenders in the USVI can be international and institutional lenders making a one-off financing or local banks in the USVI, which are often headquartered elsewhere in the Caribbean, typically in Puerto Rico, which is located about 55 miles west of the USVI, or the British Virgin Islands, which is located very close to the USVI.

As to the kinds of collateral used to secure acquisition financing in the USVI, the full range of security devices are regularly used depending on the type of collateral, the size of the financing and the creditworthiness of the borrower. Real estate collateral is often used, which includes a mortgage recorded with the Recorder of Deeds, a division of the Office of the USVI Lieutenant Governor, along with title insurance provided by recognised underwriters.

Other collateral includes asset and inventory pledges, pledges of stock and other securities collateral, personal or corporate guarantees, deposit account control agreements, as well as irrevocable standby letters of credit on occasion.

Board of directors and shareholder resolutions are standard documentation as to any acquisition financing.

Other than as mentioned with respect to real estate collateral, neither the underlying collateral documents nor the private corporate resolution documents on which the financings are based and authorised are publicly filed or available except to the parties to the acquisition. Public reference to any underlying acquisition financing is usually limited to UCC-1 filings made under the Uniform Commercial Code (UCC) adopted throughout the USA and in the USVI. UCC-1 filings typically have terse references to personal property collateral being pledged by the debtor/borrower to the secured party/lender as collateral for the financing. There are some exceptions to security interests being covered by UCC-1 filings. As an example, the USVI is a Certificate of Title jurisdiction for motor vehicles so perfection of a security interest in a motor vehicle is not covered by a UCC-1 filing, but is documented by a filing with the Bureau of Motor Vehicles.

There are not any recent legal or commercial developments in the USVI that have required material changes to our legal documentation.

The USVI has a usury statute, but it has many exceptions. For example, the usury limitations on the interest rate a lender may charge do not apply to:

• loans to entities other than natural persons, including but not limited to corporations, partnerships, limited partnerships, limited liability companies, and other legal entities;
• loans to any entity or person for business or commercial purpose; and
• adjustable rate mortgage loans secured by real property located in the USVI. 

United States federal laws, such as the Truth in Lending Act, apply.

USVI law requires consumer financial contracts to be written in “clear, simple, understandable and readable language”.

Interest payments to foreign lenders may be subject to withholding; however, most are exempt under the Internal Revenue Code as mirrored in the Virgin Islands. Where applicable, income tax withholding is reduced to 10% under Virgin Islands statute, and income received from loans secured by a mortgage of real estate in the Virgin Islands is wholly exempt from withholding. 

Certain lenders who are “doing business” in the Virgin Islands may be subject to a 5% gross receipts tax. Entities classified as banks are exempt. The definition of “doing business” is not well defined, so the facts and circumstances must be reviewed to ensure the lender is not subject to the tax.

There are no tax concerns for borrowers.

Real Property

Real property is frequently taken as collateral to secure loans. A lien on real property is granted by the owner(s) of the property signing and delivering a written mortgage to the lender. The mortgage is recorded in the applicable Office of the Recorder of Deeds, within the Office of the Lieutenant Governor. To provide notice of the mortgage and be enforceable against third parties, the mortgage must be recorded in the Office of the Recorder of Deeds. Priority is determined by the order of recording. USVI law has requirements for the valid execution of the mortgage, and the requirements differ slightly depending on whether the mortgage is signed within or outside of the USVI.

There are major US title insurance companies doing business in the USVI, such as Fidelity National Title Insurance Company, First American Title Insurance Company and Stewart Title Insurance Company.

Personal Property

Tangible and intangible personal property may also be taken as collateral for a loan. A security agreement is given to grant the security interest (lien) on the collateral. The USVI has adopted the Uniform Commercial Code, including Articles 8 and 9. Depending on the type of personal property, the security interest may be perfected by filing a UCC financing statement, possession of the collateral, or “control” (as defined in the UCC). UCC financing statements are filed in a central filing system maintained by the Department of Corporations and Trademarks, within the Office of the Lieutenant Governor. Proper perfection is crucial to establishing and maintaining the priority of the security interest.

Security interests are permitted which encumber assets owned at the time the security interest is granted and assets acquired after the security interest is granted.

Downstream, upstream and/or cross-stream guarantees are permitted.

Whenever an entity guarantees a loan to another person or entity, the lender needs to be concerned about whether the guarantor has received valuable consideration to support its guaranty of the loan. Consideration is the mutual exchange of promises or obligations between parties to a contract. It may take the form of monetary payments, services or other forms of value. For a contract to be enforceable, both parties must assume some obligation that binds them, rather than make a promise that is gratuitous.

If the guarantor does not receive sufficient consideration to support its guarantee, the guaranty may be subject to attack by creditors of the guarantor company or a trustee in bankruptcy claiming that the guaranty constitutes a fraudulent transfer. A guaranty can be considered to be a fraudulent transfer if the guarantor receives less than “reasonably equivalent value” for its guaranty and: (i) is insolvent or rendered insolvent by incurring the obligation; (ii) carries on a business or transaction for which its remaining property constitutes unreasonably small capital; or (iii) as a consequence of giving the guaranty, incurs debts that it will not be able to service.

Downstream guarantees are usually supported by consideration, because the guarantor owns the entity whose loan is being guaranteed. Upstream and cross-stream guarantees may be more problematic, and the lender should verify the consideration being received by the guarantor. 

The target may grant guarantees and collateral for the acquisition of its own shares, but the issue of the target receiving consideration (described in 5.3 Downstream, Upstream and Cross-Stream Guarantees) applies in this context.

In general, private entities do not require the consent of works council, labour unions or other similar organisations to grant a security interest or guarantee, unless the entity has entered into a contract with such organisation, such as a collective bargaining agreement, requiring such consent.

A mortgage recorded in the Recorder of Deeds Office is released by the holder of the mortgage signing and recording a release of the mortgage. A security interest granted under the UCC is released by the holder of the security interest filing the appropriate UCC form with the USVI Department of Corporations and Trademarks.

Real Property

Mortgages encumbering real estate have priority based on when the document is recorded with the Recorder of Deeds. A mortgage recorded on day one has priority over a mortgage recorded after it.

It is possible for the holder of a prior mortgage to subordinate its priority lien position to another mortgage by signing and recording a written mortgage subordination agreement.

Priority can be contractually varied amongst the lender group or two separate groups of lenders by signing and recording a written agreement specifying the rights of the various lenders.

Personal Property

For personal property covered by the UCC, the UCC has detailed provisions concerning creating and perfecting a security interest and the priority of more than one security in the same collateral. Different types of collateral may have different ways to perfect a security interest and priority may be affected by the method of perfection. For example, if the collateral is stock in a corporation, the preferred method to perfect a security interest is to take possession of the stock certificate. A security interest in corporate stock perfected by possession has priority over a security interest perfected by filing a UCC financing statement.

If the collateral is the type of collateral where a security interest is only perfected by filing a UCC financing statement, then the order of filing the UCC financing statement determines priority.

The US Bankruptcy Code determines whether contractual subordination provisions survive the insolvency (bankruptcy) of a borrower.

For real property mortgages, by statute, the government’s lien for unpaid real property taxes is superior to a mortgage, even if the real property taxes are assessed and due after the mortgage is recorded. Real property taxes are levied on an annual basis. The lender needs to make sure the real property taxes are paid at the time of closing and thereafter.

If the borrower or other loan party obligated to the lender defaults in its obligations, and the provisions of the mortgage and other loan documents permit declaring a default and commencing enforcement procedures, then the lender may take collection action, including the foreclosure of the mortgage. Foreclosure of mortgages in the USVI is accomplished exclusively by filing and prosecuting a civil action for foreclosure. A foreclosure action is started by filing a complaint in the Superior Court of the Virgin Islands or, if there is diversity jurisdiction, in the federal US District Court of the Virgin Islands.

Upon entry of a judgment of foreclosure, the mortgage and the promissory note will merge into the judgment. Upon receipt of the final judgment from the court, the creditor seeks a writ of execution enforcing the final judgment. Upon issuance of the writ of execution by the clerk, it is delivered to the marshal, who then executes it by attaching the property. Once the property is attached, the marshal will provide a sale date. Notice of the sale must then be published by the judgment creditor once a week for four consecutive weeks before the auction sale in a newspaper (including an online newspaper) of general circulation in the USVI.

Immediately after the auction sale, the creditor can move the court for confirmation of the sale and for entry of a deficiency judgment against the borrower and guarantors, as may be appropriate depending on the amount of the high bid. Unless it can be shown that there were substantial irregularities in the proceedings concerning the sale, the marshal’s sale will be confirmed by the court. In the USVI, there is a statutory right of redemption that allows the mortgagor to redeem up to six months after the court’s confirmation of the marshal’s sale. A foreclosure of the mortgage may take years to complete.

Personal Property

If the loan documents permit the lender to begin collection actions, including against the personal property collateral, then the lender may begin taking collection action against such collateral in accordance with the procedures outlined in the UCC.

In general, a choice of a foreign law as the governing law of the contract in a commercial contract between sophisticated parties will be upheld by USVI courts. There are exceptions, such as:

• the provisions of the UCC which limit the ability of parties to contract to agree that the laws of a different jurisdiction shall apply;
• internal laws and judicial decisions of the US Virgin Islands applicable to real property (or interests therein) located in the US Virgin Islands, including, without limitation, those affecting the creation, perfection, priority and enforcement of liens and security interests; and
• internal laws of the US Virgin Islands, judicial decisions and general principles of equity affecting the availability of remedies or of equitable relief, including, without limitation, specific performance or equitable remedies.

The USVI, as an unincorporated territory of the United States, follows a legal framework similar to that of the states for the recognition and enforcement of foreign judgments (ie, judgments from courts outside the USVI, including those from foreign countries or other US jurisdictions). Enforcement is primarily governed by the Uniform Foreign Money-Judgments Recognition Act of 1962 (the “1962 Uniform Act”), which the USVI has adopted in substantial part. This codifies common law principles derived from the US Supreme Court case Hilton v Guyot, 159 U.S. 113 (1895), emphasising comity (mutual respect among jurisdictions) while requiring due process.

Generally, a foreign lender may enforce its rights under a loan or security agreement in the USVI. A recitation of all potential exceptions to this general rule is beyond the scope of this general guide, but primary exceptions would be if the security agreement violated federal or USVI statutory or common law or were found to violate USVI public policy in a case of first impression. 

The United States Bankruptcy Code is applicable in the USVI. Insolvency proceedings in the USVI are filed under the US Bankruptcy Code and before a US Bankruptcy Court.

The waterfall of payments is determined by the United States Bankruptcy Code.

Bankruptcy proceedings may take years.

Company rescue or reorganisation are almost exclusively filed under the US Bankruptcy Code and before a US Bankruptcy Court.

Lenders have the same risk areas under the Bankruptcy Code as lenders in the United States.

Project finance activity occurs in the USVI and the hotel industry is the most active user. Large finance projects have also included the acquisition and renovation of the oil refinery and oil storage terminal located on St Croix, and construction of the Diageo Captain Morgan Rum distillery located on St Croix.

The USVI also has certain laws that may assist in project financing, such as the Hotel Development Act. The Act is to “provide for the planning, financing, acquisition, construction, improvement, maintenance and operation of new hotels, and the planning, financing, reconstruction, renovation, maintenance, and operation of existing hotels in the Territory”. This programme is administered by the USVI Economic Development Authority and permits qualifying applicants to use the future gains in the hotel occupancy tax and casino taxes to assist in the project financing for qualifying hotel projects.

The government of the USVI does undertake public-private partnerships. Currently, the government is negotiating with private entities for the renovation and operation of the airport on St Thomas and the airport on St Croix.

The government was also involved in the financing of the acquisition and renovation of the oil refinery and oil storage terminal, and construction of the Diageo Captain Morgan Rum Distillery. In both cases, the government provided a package of tax incentives. The Public Finance Authority also issued tax-exempt bonds secured by future revenue from the distillery to assist in the financing of the Diageo Rum Distillery.

If the government is a party to an agreement, it generally requires USVI law to govern and for disputes to be resolved in the USVI.

Private parties are permitted to select the law of other jurisdictions to govern project documents and for disputes to be resolved outside of the USVI, including through international arbitration.

US federal laws apply to foreign ownership of assets in the USVI, including the Foreign Investment in Real Property Tax Act.

USVI law does not restrict ownership of assets by foreign entities if the foreign entity complies with certain registration and reporting requirements under the USVI Criminally Influenced and Corrupt Organizations Act (CICOA). The CICOA provides that “No alien corporation that fails to file a report as required by this section or fails to maintain a registered office and a registered agent as required by this section shall be entitled to own, purchase, or sell any personal or real property in the Territory of the Virgin Islands nor shall it be entitled to sue or defend in the courts of this Territory until the requirements of this section have been complied with.”

In general, the main issues that need to be considered when structuring the deal and the legal form of the project company in the USVI are the same as in the USA. We have corporations, limited liability companies, partnerships and limited partnerships patterned after those entities in the USA.

The USVI tax code operates on what is known as the mirror theory: it applies the US Internal Revenue Code (IRC), with “Virgin Islands” substituted for “United States” wherever necessary to give the IRC proper effect in the Virgin Islands, and vice versa. The USVI has the USVI Bureau of Internal Revenue, which is its version of the Internal Revenue Service, and it is responsible for the administration of the internal revenue laws of the Virgin Islands. 

The USVI does have the authority under the Internal Revenue Code to offer tax incentives to businesses doing business in the USVI on income that is effectively connected with a USVI trade or business and USVI source income. If the transaction involves a business that may qualify for or already has those tax incentives, then the tax incentive programme rules must be considered in the structure. 

Bank financing is the most common source of financing in the USVI. For large projects, financing may include a combination of different sources of funding by banks, project bonds, and private equity. 

The USVI has very few natural resources, other than its weather, the abundant sunshine, and the ocean.

Federal environmental, health and safety laws apply and federal regulatory bodies have jurisdiction to enforce them. Federal agencies include the Environmental Protection Agency and the Occupational Safety and Health Administration.

The USVI also has environmental laws and regulations. The USVI Division of Environmental Protection is the USVI agency overseeing USVI environmental laws. The Division of Environmental Protections is a regulatory body within the USVI Department of Planning and Natural Resources.