Fitch Drops Virgin Islands Bonds to Junk

U.S. Virgin Islands' bond ratings were cut to junk level by Fitch Ratings, which cited the territory's unbalanced budget, rising debt burden and unfunded pension liabilities.

Fitch downgraded the territory's gross receipts tax bonds to BB from BBB, affecting $722 million in debt. It also downgraded the territory's senior lien matching fund revenue bonds to BB from BBB and subordinate lien matching fund revenue bonds to BB from BBB-minus. In amounts of debt, the former affected $773 million and the latter affected $428 million.

The agency also downgraded the Virgin Islands' issuer default rating to B-plus from BB-minus. Fitch has a negative outlook on the new ratings.

In its release Fitch revealed that the islands' government plans to sell $217 million in gross receipts taxes bonds, $126 million in senior lien matching fund bonds, and $69 million in subordinate lien matching fund bonds on or about Sept. 30. The bonds are to price in a negotiated sale.

In explaining the downgrades, Fitch senior director Marcy Block pointed to a "severely unbalanced operating budget" and multiple years of borrowing to fund operating needs. Block said she expected budget imbalances to continue.

Block said that the Virgin Islands' debt burden has increased and that the unfunded liability for its pensions has increased at a faster pace.

She said she expected flat economic performance over the next few years. She noted that personal income per capita is 46% of the national level.

Block also said that the U.S. governments passage of the Puerto Rico Oversight, Management and Economic Stability Act opens the door for a possible restructuring of the Virgin Islands' debt, even though it is only being applied to Puerto Rico for now. This lowered the spread that Fitch was willing to allow between the issuer default rating and the particular bond ratings.

The agency has given the ratings with the assumption that the Virgin Islands' government will pass a law to provide bondholders a statutory lien on the respective revenue streams. If this doesn't happen then the bonds' ratings will be lowered to the issuer default rating of B-plus.

Moody's Investors Service currently rates the matching fund (also known as rum tax) bonds at B1 and B2.

A spokeswoman for the islands' government didn't immediately respond to a request for a comment.

For reprint and licensing requests for this article, click here.
MORE FROM BOND BUYER