Virgin Islands power authority downgraded as Moody's lists seven obstacles

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The U.S. Virgin Islands Water and Power Authority fell even deeper into junk on the ratings scale Monday as Moody’s Investors Service listed seven factors that are pushing the utility closer to default.

Moody’s dropped WAPA’s senior electrical system bonds to Caa2 from Caa1and its subordinated bonds to Caa3 from Caa2. The agency has negative outlooks on both ratings. On Friday Fitch Ratings put the authority’s CCC rating on rating watch negative.

The rating actions come two years after a pair of hurricanes devastated the islands' infrastructure. Last week a series of power outages prompted the Virgin Islands' non-voting representative to Congress to call for the local government to declare an emergency and suggest that the authority’s $252 million in bonds and $633 million in total debt may need to be adjusted.

Moody’s Lead Analyst Kathrin Heitmann explained its downgrade by saying “the default risk of the Virgin Islands Water and Power Authority has increased given an unsustainable capital structure with very tight liquidity, high debt load including a substantial unfunded pension liability, the increased frequency of power outages, reducing the reliability of the electric system, high electric rates, and chronic challenges facing the economy.”

WAPA’s situation is “unsustainable without improvements in VIWAPA’s operating cash flow generation, given the weak liquidity profile with no unrestricted cash on balance sheet and use of overdrafts to manage liquidity, and a history of difficulties to pay fuel suppliers on time,” Heitmann said.

Heitmann noted that there is refinancing risk in the next several years as almost 40% of its senior and subordinated debt matures through 2022, some of which includes bullet or balloon obligations needing to be refinanced.

Nevertheless, Heitmann said WAPA had at least two positive developments over the past year. For one, the government paid down overdue receivables at the end of July. Secondly, the U.S. government has promised grants to provide funds to harden the transmission and distribution system against hurricanes and to acquire new generating units and build renewable energy systems.

Fitch Managing Director Dennis Pidherny explained Fitch’s rating watch by citing “comments by public officials that loan forgiveness and financial assistance from federal agencies should be sought as a means of addressing the utility’s weak financial profile.” This may be a reference to the letter Virgin Islands Delegate Stacey Plaskett sent Wednesday to Gov. Albert Bryan and Senate President Novelle Francis. Plaskett is the islands’ non-voting representative in the U.S. Congress.

Rating agency watches are usually resolved with a rating change or affirmation within 90 days. Rating agency outlooks address possible actions over the course of 18 months.

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Speculative grade bonds PROMESA Virgin Islands Water and Power Authority Government of the Virgin Islands U.S. Virgin Islands