Fitch Ratings and Standard & Poor's affirmed the United States Virgin Islands' gross receipts tax rating but Fitch downgraded the territory's implied general obligation rating to BB-minus from BB.
Fitch affirmed its BBB rating for the GRT bonds, and Standard & Poor's affirmed its BBB-plus GRT rating.
Fitch retains a negative outlook on both ratings. S&P has a stable outlook.
The ratings actions come ahead of an expected $122 million U.S. Virgin Islands Public Finance Authority GRT bond issue.
The Virgin Islands expects to sell the $60.8 million series 2014A and $60.8 million series 2014B bonds in the next few weeks, said Virgin Islands commissioner of finance Ángel Dawson.
The gross receipts tax ratings affect $818 million of debt including the new bonds. The islands have a total of $2.1 billion of debt as of June 1, according to Fitch senior director Marcy Block.
The commonwealth has no GO debt outstanding but does offer its general obligation guarantee as a backup on the GRT debt.
Block said that GRT tax revenue has been insulated from general fund operations by being allocated to a separate escrow account.
"The negative outlook on the GRT bonds reflects the weak United States Virgin Islands economy and concern that the Virgin Islands will over-leverage this revenue source," Block said.
The territory's weak economy led Fitch to downgrade the GO rating. It continues to be affected by the aftermath of the Great Recession and the closure of its largest employer, an oil refinery, in early 2012. Its unemployment rate in March was 12.8%.
The Virgin Islands government is also struggling with "extremely high" tax-supported debt, Block said. It has high liabilities for pensions and unpaid retroactive salaries.
Dawson hailed the Fitch GRT rating affirmations.
"Affirming these ratings reflects the strong debt service coverage and security features on these bonds, and is important to sustaining strong investor interest in our bonding program," he said.
"We were not surprised by Fitch's shadow rating action," Dawson continued, referring to the GO downgrade. "The Fitch shadow rating is not a rating on any bonds that we have issued or plan to issue, as we do not sell general obligation bonds per se. Rather, Fitch has used the shadow rating to convey its concerns about the general financial condition of the government, and the fact that the government has continued to borrow for working capital purposes.
"We share Fitch's concern, but believe that the government is making progress toward achieving renewed financial stability. We had hoped that 2014 would be the last year with bond funded working capital, but we are not quite out of the woods yet. We are well aware of the challenges that we have faced and that we continue to face. It would be nice to be graded on the progress that we have made, rather than just the work yet to be done, but we understand that is not Fitch's job."
