USVI Bonds Rocked by Hur­ri­canes

The Bond Buyer - - Front Page - By roBert slavin

U.S. Vir­gin Is­land bonds have plunged since Hur­ri­cane Maria amid deep­en­ing con­cern over the ter­ri­tory’s abil­ity to make pay­ments due in the com­ing year.

Prices of the Se­ries 2014C U.S. Vir­gin Is­lands gross re­ceipts tax bond in the sec­ondary mar­ket have de­clined by 40%, ac­cord­ing to Markit. The bonds trade at about 44 cents on the dol­lar, down from about 74 cents in mid-Septem­ber.

The rat­ing agen­cies had al­ready down­graded the is­lands’ GRT and match­ing fund (rum tax) bonds deep into spec­u­la­tive ter­ri­tory ear­lier this year. In­clud­ing the debt of the fi­nan­cially strapped Wa­ter and Power Au­thor­ity, the is­lands’ gov­ern­ment en­ti­ties have over $2 bil­lion in debt out­stand­ing.

Hur­ri­cane Irma slammed the ter­ri­tory’s two main north­ern is­lands in early Septem­ber, fol­lowed by Maria, a cat­e­gory 5 storm – the strong­est type as rated by the Na­tional Hur­ri­cane cen­ter – when its eye wall passed over the ter­ri­tory’s south­ern is­land of St. Croix.

“The gov­ern­ment was un­able or un­will­ing to ad­dress its eco­nomic and fi­nan­cial prob­lems—eco­nomic and pop­u­la­tion de­cline, a large struc­tural deficit, ex­tremely weak liq­uid­ity, and the im­pend­ing in­sol­vency of the em­ploy­ees’ re­tire­ment sys­tem—prior to the hur­ri­canes,” said Moody’s In­vestors Ser­vice se­nior vice pres­i­dent Ken Kurtz. “It seems un­likely that of­fi­cials will be able to ad­dress th­ese prob­lems in the near fu­ture, given that do­ing so will be more dif­fi­cult in the wake of the storms than it was be­fore.”

Moody’s doesn’t rate the GRT bonds. It rates the se­nior and sub­or­di­nated match­ing fund bonds Caa1 and the sub­or­di­nated in­den­ture Di­a­geo and Cruzan bonds Caa2.

This fall S&P Global Rat­ings and Fitch Rat­ings with­drew their rat­ings after the is­lands’ gov­ern­ment stopped shar­ing fi­nan­cial in­for­ma­tion with them.

The fed­eral gov­ern­ment has ap­proved a fed­eral dis­as­ter loan for the Vir­gin Is­lands, which re­port­edly faces a 36% deficit this fis­cal year, even if it ac­cepts $300 mil­lion of the loan. In early De­cem­ber Vir­gin Is­lands Sen. Jean Forde said the Se­nate de­cided to ac­cept no more than $500 mil­lion ul­ti­mately and $300 mil­lion im­me­di­ately.

On Christ­mas Day the St. Croix Source news web­site pub­lished an ar­ti­cle that as­serted: “If the V.I. gov­ern­ment and [the U.S.] Congress do not step up and take dif­fi­cult, se­ri­ous steps quickly, the un­filled bud­get short­falls will play out painfully and chaot­i­cally.”

Moody’s Kurtz said, “The fed­eral gov­ern­ment ap­pears will­ing to as­sist the Vir­gin Is­lands with the di­rect costs of the storms, the restora­tion or re­place­ment of pub­lic build­ings and in­fra­struc­ture, and, through the com­mu­nity dis­as­ter loans, off­set lost tax rev­enues.

“There is no in­di­ca­tion that the fed­eral gov­ern­ment in­tends to as­sist the Vir­gin Is­lands ad­dress its un­der­ly­ing eco­nomic and fi­nan­cial prob­lems,” Kurtz con­tin­ued. “In fact, if the com­mu­nity dis­as­ter loans are not for­given, the fed­eral gov­ern­ment has weak­ened the Vir­gin Is­lands’ fi­nan­cial po­si­tion by in­creas­ing its debt load and re­duc­ing the amount of match­ing fund rev­enues and gross re­ceipts taxes avail­able to fund op­er­a­tions.”

The fed­eral gov­ern­ment has usu­ally for­given com­mu­nity dis­as­ter loans.

On Dec. 15 Mu­nic­i­pal Mar­ket An­a­lyt­ics’ De­fault Trends said the GRT bonds “ap­pear to not be making full monthly de­posits ahead of their April 1 debt ser­vice pay­ment date.” Based on this, De­fault Trends put the bonds in its “other” cat­e­gory.

Asked about the De­fault Trends re­port, a spokesman for the Vir­gin Is­lands said in an email, “all Monthly Trans­fer Re­quire­ments of GRT col­lec­tions have been re­ceived on a timely ba­sis as re­quired un­der the GRT In­den­ture and the 2018 MFR debt ser­vice re­quire­ments were fully funded prior to Oc­to­ber 1, 2017 in ac­cor­dance with the re­quire­ments of the MFR In­den­ture.”

He added that the Vir­gin Is­lands had made its sched­uled gross re­ceipts tax and match­ing funds rev­enue bond pay­ments.

MMA part­ner Matt Fabian said he had sources in­di­cat­ing the Vir­gin Is­lands hadn’t made the monthly trans­fers for a pe­riod. He added that the gov­ern­ment may have cured the prob­lem and the gov­ern­ment state­ment made him be­lieve the gov­ern­ment was in fact making the monthly pay­ments.

How­ever, bond­hold­ers have big­ger con­cerns con­cern­ing the U.S. Vir­gin Is­lands’ abil­ity to pay its debt than the April 1 GRT pay­ment, Fabian said. De­fault Trends also has the match­ing funds rev­enue and WAPA bonds in its “other” cat­e­gory.

In early Oc­to­ber U.S. Rep. Rob Bishop, R-Utah, said the mem­bers of Congress would con­sider ex­tend­ing some­thing like the Puerto Rico Over­sight, Man­age­ment, and Eco­nomic Sta­bil­ity Act to the U.S. Vir­gin Is­lands. This would open the door to a debt restruc­tur­ing for the more than $2 bil­lion in pub­lic sec­tor Vir­gin Is­lands debt. Bishop chairs the House com­mit­tee that over­sees Puerto Rico and the Vir­gin Is­lands. ◽

”The gov­ern­ment was un­able or un­will­ing to ad­dress its eco­nomic and fi­nan­cial prob­lems [even] prior to the hur­ri­canes,” said Ken Kurtz at Moody’s.

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