U.S. Virgin Islands Gross Receipts Tax bonds sustained a seven notch cut in their credit rating from S&P Global Ratings, which cited concerns over a weak economy and plans to issue more debt.

S&P dropped its rating on the gross receipts tax bonds to B from BBB-plus on Thursday.

In a separate action the rating agency downgraded the Virgin Islands' matching funds bonds three notches. The senior-lien bond rating dropped to BB from BBB and the subordinate lien bonds sank to BB-minus from BBB-minus. S&P's outlook on all these bonds remains negative.

In early November the Virgin Islands Senate passed a bill to sell a $247 million bond. With 13 yes votes and two no votes, the Senate overrode a veto of the bond by Gov. Kenneth Mapp, according to the VI Consortium web site.

According to a Nov. 10 Fitch Ratings report, the Virgin Islands Public Finance Authority planned to sell a $136 million senior matching funds bond and a $69 million subordinate matching funds bond in the week of Nov. 21. This wasn't brought to the market.

The Virgin Islands governor's office didn't respond to an inquiry about S&P's rating action for this story.

Fitch Ratings rates the gross receipts tax bonds BB, the senior matching fund bonds BB, and the subordinate matching fund bonds BB-minus. Moody's rates the senior matching funds bonds B1 and the subordinate bonds B2. Moody's doesn't rate the gross receipts bonds.

In explaining its downgrade of the gross receipt tax bonds, S&P pointed to the islands' weak economic conditions, declining debt coverage, and the potential that additional debt will further dilute the coverage. S&P analysts John Sugden and David Hitchcock said the agency was concerned about "the government's fiscal distress, as evidenced by its significant structural imbalance and continued reliance on deficit financing to fund operations, weak financial reporting, significantly underfunded pension liabilities, and negative fund balances."

Sugden and Hitchcock offered a similar explanation for their downgrades of the matching funds bonds. They were analyzed using both S&P's "Federal Future Flow Securitization" and S&P's "Special Tax Bond" criterion. They were given the lower rating attributable to the special tax bond criteria.

Among other things, the analysts were concerned by the need for annual gubernatorial instructions to the U.S. Treasury as well as regular U.S. federal approvals. They were also concerned about the concentrated base of tax revenues, with just two companies' rum production generating all the revenues.

According to Fitch the Virgin Islands government had $1.92 billion of debt outstanding as of Aug. 22. The islands' Water and Power Authority has additional debt.

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