U.S. Virgin Islands Pulls Bond Sale

The U.S. Virgin Islands withdrew a $219 million bond sale, raising the specter of tax increases and government services cuts after preliminary pricing showed a lack of investor demand for the territory's debt.

The government had planned to use $116 million of proceeds to cover an operating deficit in the current fiscal year, which has a $900 million budget. If the government fails to enact new taxes following the failure of the bond sale, it would lead to a "drastic impact on the government of the Virgin Islands," Gov. Kenneth Mapp said Friday, according to the VI Consortium web site.

Morgan Stanley brought the Virgin Islands Public Finance Authority's issue to the market for preliminary pricing on Jan. 11. The senior bonds maturing in 2036 were priced at yields to maturity of 7.5%, or 69 basis points above the secondary market. The subordinate bonds maturing in 2035 were priced with yields to maturity of 7.75%, or 78 basis points higher than in the secondary market.

The government got orders for $127 million of the senior lien bonds and $13 million of the subordinate lien bonds, according to the St. Thomas Source web site.

In the aftermath of the bond sale abandonment, on Tuesday Fitch Ratings downgraded the islands' matching fund (rum tax) bonds and its gross receipts tax revenue bonds to BB-minus from BB. Fitch dropped the islands' issuer default rating to B from B-plus and put all the ratings on negative watch.

The downgrade stems from increased "concern regarding both the USVI's ability to access financial markets for their debt offerings as well as the USVI's ability to fund current operations and obligations from a severely strained cash position," Fitch senior director Marcy Block wrote.

The Islands had $1.92 billion of debt outstanding as of Aug. 22, according to Fitch.

The senior matching fund bonds are rated B1 by Moody's Investors Service and BB by S&P Global Ratings. The agencies rate the subordinate bonds one notch lower.

In response to the failure of the bond sale, on Friday Gov. Mapp proposed a series of tax increases to aid the government and to provide the conditions for the government to successfully return to the bond market. Specifically, Mapp wants to increase taxes on cigarettes, alcohol, carbonated sugar beverages, and introduce a tax on time share rentals.

Three Virgin Island Democratic Senators voiced opposition to Mapp's proposed taxes, according to the VI Consortium. They said the government should instead be looking at cost-saving methods and alternative revenue-generating approaches.

"I am currently doing a comprehensive review of the governor's plan, with the intent of making recommendations that support infrastructural development and revenue generation," one of the dissenting senators, Novelle Francis, Jr., said in an email. "In the short term, I support expedited approvals for the territory's Economic Development Commission program, which should help to attract business and also ensure a faster influx of funds. I am also sponsoring legislation that would create a Free Trade Zone on the island of St. Croix, with the goal of establishing a hub for light manufacturing and industrial development."

Mapp is a registered Republican who ran for governor as an independent. In the last few days he said without the bond and without revenue-generating or revenue-saving measures, the government may be unable to make February's payroll and certainly wouldn't be able to make payroll for March or future months. The fiscal year ends on Sept. 30.

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