Virgin Islands Selling $219M Wednesday After Downgrades

The U. S. Virgin Islands, facing higher yields after Congress passed legislation to allow Puerto Rico to restructure its debt, is selling two speculative-grade bonds totaling $219 million to cover operating deficits.

The Virgin Islands Public Finance Authority plans to issue $145 million in senior matching fund loan notes and $74 million of subordinate securities, on Wednesday. The financial advisor, Standard International Group, told The Bond Buyer the sale date this weekend.

Morgan Stanley is the lead underwriter. Jefferies is also underwriting the deal.

The matching fund bonds are backed by taxes on Virgin Islands rum sold in the United States.

The ratings on outstanding matching fund senior bonds are BB from S&P Global Ratings and Fitch Ratings and B1 by Moody's Investors Service. The outstanding subordinate lien bonds are rated BB-minus by S&P, BB by Fitch, and B2 by Moody's.

The Virgin Islands has several similarities to Puerto Rico. It is a U.S. territory, it has comparatively high levels of debt compared to the islands' income, and its economy has been weak in recent years.

The outstanding bonds' yields have been increasing in trading in the secondary market over the past year. There was a spike upward in the early summer with the passage of the Puerto Rico Oversight, Management and Economic Stability Act, according to data from IHS Markit. The yields also markedly increased in November and December.

According to Markit the 2029 maturity of a Virgin Island matching fund bond traded at 3.06% on March 11 and at 6.78% on Dec. 29, both in block sized trades.

One municipal bond analyst said he thought the new bonds would sell about 400 basis points over the AAA benchmark at the long end. The bonds may trade at an even greater spread in maturities of 10 to 15 years.

Proceeds from the bonds are to be used for the government's operating deficits.

S&P downgraded the senior matching fund bonds by three notches on Dec. 1 to BB. "The downgrades reflect S&P's post-PROMESA concerns that, despite the structural insulation of both securities repayment streams from direct exposure to the island's fiscal crisis, no bondholder can assume themselves to be above the fray," said Municipal Market Analytics in its Weekly Outlook. "And in USVI, that fray is considerable."

"Any spread in financial turmoil across the U.S. territories is reasonably a positive development for Puerto Rico's efforts to secure incremental federal aid, our theory being that help for all territories would be easier to secure than a one-off bailout," MMA stated.

In early December it was reported that the bonds' maturities would run from 2017 to 2036 for the senior bond and from 2017 to 2035 for the subordinate. Neither Standard International nor Morgan Stanley responded Monday to questions on this topic.

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