PHOENIX – Some $227 million of U.S. Virgin Islands (USVI) Water and Power Authority (WAPA) revenue bonds received downgrades from Fitch ratings Friday due to a “persistent strain” on the issuer’s liquidity.
The downgrade includes dropping $127 million of electric system revenue bonds series 2012A, 2010A, 2010B, 2010C, 2003 to BB-minus from BB. It also covers cutting $100 million of electric system subordinated revenue bonds series 2007A, 2012B, 2012C to B-plus from BB-minus. The ratings for the bonds have been placed on negative watch, which Fitch said it plans to resolve within the coming months following the release of audited financial statements for the previous fiscal year, along with other financial data.
The island chain territory can, along with Puerto Rico, Guam, American Samoa, and the Northern Marianas Islands, issue triple tax-exempt debt. But the USVI WAPA is highly leveraged, Fitch said, and low on cash. The territory’s economy is heavily dependent on tourism, and has exceptionally high electric rates, declining sales, and per capita personal income levels that approximate just half of the U.S. average, the agency added.
“The downgrade reflects WAPA's reduced capacity for timely repayment of outstanding debt service obligations as evidenced by a persistent strain on available liquidity,” Fitch said. “Liquidity pressures have been driven by consistently low unrestricted cash reserves balances, escalation in already high government receivables and high levels of borrowing under the authority's available lines of credit. Through the first six months of the current fiscal year, unrestricted cash declined to just $5.1 million (equal to 18 days cash on hand), compared to $10.9 million at fiscal year-end 2015. Moreover, remaining borrowing capacity under the lines of credit totals just $2 million.”
WAPA's prior fuel supplier, Trafigura Trading, recently filed a complaint in district court alleging the authority failed to pay an outstanding balance of almost $25 million for prior fuel deliveries made during a portion of 2015.
Market analysts have said that triple tax-exempt issuers have benefited from attention from investors who no longer see Puerto Rico bonds as viable, but have also noted similar risks inherent in their small, undiversified economies. Fitch said that further evidence of reduced capacity for timely repayment of outstanding debt service obligations, including diminished cash balances, no access to short-term credit or sizable unanticipated obligations related to pending litigation could result in further negative rating actions.
