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Following Bond Market Shutout, Ratings Agencies Hammer Virgin Islands with Downgrades

Last week, I discussed how the US Virgin Islands’ had been shut out of the bond markets. The big ratings agencies have noticed as well, and begun to react:

But on Tuesday Fitch replaced its recent negative watch with a negative outlook, and downgraded the territory’s bonds further into junk status, dealing another crushing blow to a government already under immense financial pressure. According to Fitch, the negative outlook reflects its assessment that the USVI will remain challenged in stabilizing its financial operations and its debt and pension positions.

The government’s “USVI” and “Public Finance Authority” bonds were downgraded to the following:

–Issuer Default Rating (IDR) of the USVI, to ‘CCC’ from ‘B’;

The USVI’s financial resilience is very limited. It is hampered by an unrestricted fund balance deficit of $89.9 million that equated to 10% of revenues in fiscal 2016, prior leveraging of significant revenue streams that reduces resources available for operations, and the high fixed costs for debt service and retiree benefits noted earlier that reduce its ability to respond to cyclical weakness. The fiscal 2016 audit reported a $3.7 billion total governmental funds deficit position that captures the long-term pension liability and sizable bonded debt outstanding. At present, the USVI does not carry a budget reserve. Of note, the auditor declined to offer an opinion on the financial statements for several major funds in fiscal 2016. The disclaimers highlighted substantial faulty, missing, or inaccurate records that were unable to provide support to the USVI’s financial information.

When an auditor is unable to offer an opinion, it’s usually because the auditor hasn’t been able to verify the accuracy of the financial statements. It’s therefore likely the problem with the Virgin Islands’ debt could be even worse, and covered up by fuzzy accounting given that records are apparently both missing and inaccurate.

The speed at which these downgrades have hit the Virgin Islands has been pretty shocking. Back in December, S&P downgraded the islands to a B from a BBB+, which was described at the time as a “superdowngrade.” In just one year, the ratings have essentially gone from “investment grade” to teetering on the edge of bankruptcy.

The panicky actions of the ratings agencies have been driven in part by what happened to Puerto Rico when they defaulted in July. The collapse of the territory’s credit ratings has destroyed their ability to borrow, and without being able to borrow, they can’t make up for the hole in their budget. The Virgin Islands’ situation was always unsustainable, but the actions of the ratings agencies have sped up that day of reckoning considerably. No investor is going to touch bonds from a territory which has dropped so far so fast.

Not only did Fitch downgrade the country, but S&P also delivered a downgrade to several of the country’s bonds:

With two of the three major U.S. ratings firms issuing the USVI stinging downgrades and outlooks almost in tandem, a third action by Moody’s would not come as a surprise. And the downgrades could not come at a worse time for the territory; even before the latest downgrades, the Government of the Virgin Islands (G.V.I.) already had no access to the bond market, which the G.V.I. had used yearly to meet a structural deficit of roughly $100 million. Lawmakers and the Mapp administration have since attempted to address the money issue by enacting new tax laws while implementing belt-tightening measures, but so far these moves have not produced substantial results.

S&P says the ‘CCC+’ rating on the matching fund and gross receipt tax bonds reflect its view of USVI’s persistent fiscal and liquidity pressures in the face of a continued inability to access the capital markets, as reflected in growing payables despite the adoption of its recent five-year plan, said S&P Global Ratings credit analyst Oladunni Ososami. S&P says it believes ongoing liquidity pressures and the potential inability of the territory to meet ongoing business operation obligations indicate near-term liquidity pressures consistent with its “Criteria for Assigning ‘CCC+’, ‘CCC’, ‘CCC-‘, and ‘CC’ Ratings” (published Oct. 1, 2012, on RatingsDirect).

While repayment of the notes may not face an immediate liquidity crisis in the next 12 months, given the current deposit of pledged revenue to the trustee account for next year’s debt service, S&P believes repayment of the notes appears unsustainable in the long term, given the territory’s dependence on future favorable conditions to meet its financial commitments.

“Although the territory adopted the five-year economic growth plan in March, it has continued to deal with liquidity pressures without access the capital market. Current liquidity levels are about three days’ cash, augmented in part by a significant amount of payables which continues to grow, and estimates show the territory could be facing a negative cash balance by the end of August without any additional cash flow management initiatives, which we believe leaves USVI vulnerable to a total depletion of cash before the end of the current fiscal year,” said Ms. Ososami.

The article above is saying a default on the downgraded notes is unlikely for the next twelve months, because as a “safety” mechanism, the Virgin Islands has money deposited which is pledged for making repayments on this debt. However, the real problem for the US Virgin Islands is that the islands have been borrowing money to fill in a budget hole of $100 million and this has been going on for years.

How will they run their government without the borrowed money? The answer is, they probably won’t. Before the end of the year, I think it is very possible we will see a PROMESA-like law (VIOMESA?) enacted by Congress to start managing the Virgin Islands’ debt situation. That is, assuming Congress is actually capable of doing something useful beyond raging angrily about Trump.

 
Doomberg

Written by Doomberg

I am Doomberg, one of the original founding members of Sparta Report, and have been here since the beginning. I am an insatiable news junkie and enjoy reading and writing about the US territories, the Caribbean, video games, smartphones, and of course conservative politics in general.

I also really like pictures of gas stations and claim full responsibility for the silly gas station motif. I'm presently trapped behind enemy lines in a blue state with no hope of escape! The ride never ends.

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