Virgin Islands Plans $1B Bond Despite Ratings Actions, Puerto Rico Concerns

U.S. Virgin Islands officials said they plan to sell a $1 billion bond, even as analysts raised concern that the territory's debt could be subject to restructuring under the new federal law set up for Puerto Rico.

On top of Fitch Ratings putting several of the island's bonds on negative credit watch on Wednesday, Moody's downgraded its rum tax bonds by six notches on June 30. By the government's own admission, Puerto Rico's historic July 1 default and the U.S. government's adoption of PROMESA, covering all the territories, has also hurt the way its credit is seen in the muni market.

The rum tax bonds, also known as matching fund bonds, are based on taxes on rum imported into the 50 states from the islands. They are supported by the direct payment from the U.S. Treasury of the pledged tax revenue to a special escrow agent/trustee.

Both Fitch and Moody's are concerned that the movement of payments could be disrupted. Moody's says that the arrangement is authorized annually by the islands' government and in an extreme situation the government might choose not to authorize it.

The government's financial situation has generally become more difficult since the Great Recession. Net tax supported debt increased to $1.99 billion as of Sept. 30, 2015, from $728 million, largely due to deficit financing. The islands' pension unfunded actuarial accrued liability increased by 41% in the same period to $1.974 billion.

The Virgin Islands' gross domestic product dropped at a compounded annual rate of 2.7% to 2014 from 2009. In response Moody's downgraded the various matching fund bond forms to B1 or B2. "What Moody's Investment Services did when they downgraded the Virgin Islands (by almost six notches) was not only unprecedented, it raised some serious questions and concerns about their current practices," Virgin Islands Public Finance Authority executive director Valdamier Collens wrote in an email.

"We all recently saw what Congress classified as a financial rescue bill for our sister territory of Puerto Rico; which, by the way, was a bill that both [Virgin Islands] Governor Kenneth Mapp and Delegate Stacey Plaskett opposed in its current form," he continued.

"All Virgin Islanders should understand that these recent downgrade actions are inextricably linked to what has taken place with Puerto Rico," wrote Collens, who was serving as acting governor while Mapp was outside the territory. "Congress may well believe that they stepped in to fulfill their constitutional responsibilities and support the territories, in this case Puerto Rico; however, what they may have also done is fundamentally destroy the ability of the rest of the territories to continue to survive and act as responsible, sovereign debt issuers in the capital markets, which I believe is incredibly wrong.

"Thus, it is EXTREMELY important to note here that the Virgin Islands did nothing to materially trigger these actions by Moody's or the opinions of Fitch. Yes, we have our fair share of financial challenges, but no more [or] less than any other states in the mainland or that of our other sister territories.

"Congress and then Moody's and in a short time Fitch, together may have taken actions that will make it more difficult for the USVI government to borrow money in the municipal market and address the very real problems that we face. Fortunately, we have a governor and an administration that will not blink, nor will we flinch in the face of such actions, or challenges."

Gov. Mapp currently anticipates the September bond will include about $250 million in new money, $450 million in restructuring, and $300 million in economic refunding money, said André Wright, executive vice president of Standard International Group, Inc., the islands' municipal advisor. The purpose of the bond is to provide four years of cash flow relief and to finance new projects, he said.

According to data from Markit, investors were unperturbed about recent developments before Fitch's action late on Wednesday. Trading of 2009B senior lien 5s maturing in 2025 jumped from a 1.589% yield on Wednesday to a 4.828% yield on Thursday.

On Thursday the Virgin Islands Consortium news web site quoted Virgin Islands Senate Vice President Janette Millin Young as saying, "We are seeing a repeat of the fiscal crisis that has hit our sister territory of Puerto Rico coming directly toward us. We must do everything in our power to avoid a fiscal catastrophe."

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