Moody’s Investors Service has withdrawn its general obligation gross receipts tax rating of the United States Virgin Islands, citing a lack of information from the issuer.
Prior to the withdrawal Moody’s had a Baa2 rating on the gross receipts tax GO debt.
The action affects about $450 million of debt that was issued through the Virgin Islands Public Finance Authority.
The debt is secured first by gross receipts tax revenue in the territory. The territory’s government also provides its general obligation pledge. As of October 2012 the Virgin Islands had no general obligation debt besides the gross receipts tax debt.
For United States holders the Virgin Islands’ debt carries a triple tax exemption from federal, state, and local taxes.
Moody’s withdrew its rating due to a “lack of sufficient financial and operating information,” wrote senior vice president Kenneth Kurtz and vice president Emily Raimes.
The territory’s government released its audited fiscal 2010 financial statements on Nov. 30, 26 months after its fiscal year ended. The government has said it does not expect to meet a nine month standard for releasing its report until fiscal 2013, Kurtz and Raimes wrote. “Its ability to meet this target is uncertain,” they wrote in November, when Moody’s placed the rating on review because of the lack of financial and operating information from the territory.
Moody’s is retaining a Baa2 rating on most of the Virgin Islands Public Finance Authority’s revenue bonds, also known as Virgin Islands matching fund loan notes. The exceptions to this Baa2 rating are Baa3 ratings on the authority’s subordinated indenture series 2009A (Cruzan Project) matching fund bonds and subordinated indenture series 2009A (Diageo Project) matching fund bonds. The outlooks are stable.
Moody’s action was not due to a deterioration in the territorial government’s financial situation, said David Paul, president of Fiscal Strategies Group, the territory’s financial advisor. Rather, it reflects a changing regulatory environment around Moody’s, he said. Moody’s could not be immediately reached for a response.
The bonds are payable from revenues entering a lock-box type structure, Paul said. An accounting company posts receipts online on a quarterly basis.
The current administration of Governor John de Jongh has been in power since January 2007. When the administration came into power it initiated a complete change in financial management system and a change in the financial auditor, said Angel Dawson Jr., who serves as both executive director of the authority and commissioner of the Virgin Islands’ Department of Finance.
Dawson said the administration has made progress in making the financial statements up-to-date. With all the changes to financial adminstration initially, “there was a number of moving parts and there has been some progress made,” Dawson said.
The Department of Finance expects to have audited fiscal year 2011 reports available in May and audited fiscal year 2012 reports available in November, Dawson said.
In February 2012 Moody’s dropped the Virgin Islands’ general obligation gross receipts tax bonds to Baa2 from Baa1, citing the depletion of general fund reserves. Moody’s also noted that despite the government’s efforts to restore balance to its budgets, the government has had persistent structural deficits.
Next, the closure of the Hovensa oil refinery has added pressure to the island, Moody’s stated.
The territorial government’s low rating was also explained by its high debt levels and large unfunded pension and post-employment benefit liabilities.
Fitch Ratings has a BBB rating on the U.S. Virgin Islands public finance authority bonds (gross tax loan note) with a negative outlook. In October it released a rating report that pointed to several factors for the rating.
“Bonds issued by [the authority] and secured by the gross receipts tax are fairly insulated from general fund operations and debt service coverage remains significant,” wrote Fitch senior directors Marcy Block and Douglas Offerman. There will be an unknown loss in tax revenues due to the closing of the refinery, the territory’s largest taxpayer and employer, they wrote.
The islands’ government has also suffered sharp revenue declines, prolonged tax litigation, and difficulty in reducing expenditures, the Fitch analysts wrote.
The territory suffers from extremely high tax-supported debt and the territory’s economy “is limited, dependent on tourism and vulnerable to disruption from natural disasters,” the Fitch analysts wrote.
Standard & Poor’s has a BBB-plus rating on the debt, according to the Municipal Securities Rulemaking Board’s EMMA website.
