PHOENIX - American Samoa is getting ready to sell $73 million of junk-rated bonds next month.
The arrival of another credit to join Puerto Rico, the Virgin Islands and Guam in the triple-tax-exempt category has at least one analyst wary.
H.J. Sims senior credit analyst Richard Larkin said that because American Samoa has not been able to get clean audits, there is no reason to believe that its disclosures are credible.
"Until they can get clean auditors' opinions, this issuer has to be viewed as suspect and speculative—not for your average retail investor," Larkin said.
The Pacific territory's Economic Development Authority is a new issuer and its bonds have been rated only by Moody's Investors Service, which assigned a speculative Ba3 rating.
The bonds are scheduled to sell by negotiation Aug. 10, with George K. Baum & Company and KeyBanc Capital Markets as underwriters. The authority was created in 1986, but has no bonds outstanding.
Like the bonds of Puerto Rico and other U.S. territories, American Samoa can sell debt that is tax-exempt federally, locally, and in all 50 states and the District of Columbia.
The deal will include $40.4 million that is tax-exempt, with the balance federally taxable.
The bonds are being issued to take out outstanding loans to the pension system, and to help capitalize a proposed a charter bank to be owned and operated by the government.
The bonds are secured by a mixture of revenues that include personal income taxes, corporate income taxes, and certain other taxes such as a tax on imported beer, malt extract, motor vehicles, and more. The bonds are also backed by the full faith and credit of the territory.
The territory of roughly 55,000 people some 2,700 miles southwest of Hawaii has some economic issues that reflect the junk rating and which analysts say may make them suitable only for institutional investors.
The territory's governmental funds reported a combined fund balance deficit of $10.7 million in its fiscal 2014, as compared to the prior year's combined fund balance deficit of just under $3 million, according to financial disclosures in the preliminary official statement.
The territory also admitted in its offering documents that the bank project is a big unknown.
"The charter bank is being formed due to the impending cessation of banking operations in the territory by the only bank currently providing full service banking services in the territory," the documents says. "The charter bank is a new enterprise and the territory has no previous experience operating a bank. Although the territory has undertaken a variety of studies and engaged experts and consultants, the likelihood of success of the charter bank is unknown at this time."
The American Samoa government declined to discuss the sale, referring all inquiries to its underwriters. George K. Baum first vice president Matt Dugdale said he would discuss it after the sale.
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