Calling for Tax Increases, Fitch Downgrades USVI Bonds Again

The Fitch ratings agency downgraded existing and potential new USVI bonds yet again on Tuesday. All three ratings agencies: Fitch, Moody’s, and Standard and Poor all downgraded the territory in 2016, stymieing hopes of refinancing existing debt at lower costs and making it harder to borrow.

The Legislature approved a statutory lien on rum revenues and gross receipts tax revenues, so that lenders see V.I. revenues before the territory does, during a session in December as part of an effort to improve the territory’s credit rating.

Gov. Kenneth Mapp proposed several tax increases – on alcohol, tobacco and time shares – to boost revenues and reassure lenders but senators voted down the plan in December, saying they wanted to hear from the business community before considering any tax increases.

Along with the same general issues of rising debt levels and structural deficits, Fitch cited the territory’s inability to sell bonds on Jan. 11. (See: Mapp: No Bonds Right Now, V.I. Needs New Taxes to Sustain Budget in Related Links below)

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They also cited the failure to enact tax increases to generate more revenues, saying: "According to the USVI, market reception to the bonds is contingent on USVI passage of tax reform measures. Enactment of the tax reform measures requires legislative agreement, which is inherently uncertain."

Fitch said in its release, “"To date, the USVI legislature has declined to enact these measures although the governor has called for a special legislative session to again consider these proposals the week of Jan. 23."

Some market analysts have begun to speculate that the territory is heading down the same path as Puerto Rico and will require federal intervention and debt restructuring. (See: Analysts Worry USVI Following Puerto Rico’s Path) This latest downgrade does not help with that concern.

Fitch downgraded the "issuer default rating" for the USVI to "B" from "B+" The IDR is a rating of how likely a general default is. Fitch’s IDR ratings go from AAA, for the highest quality, down through D, for entities already in default. According to Fitch, a "B" is below investment grade and is "highly speculative," but is above a "CCC" rating that would indicate "substantial credit risk."

Fitch lowered specific bond ratings as follows:

– V.I. Public Finance Authority senior lien matching fund revenue bonds to ‘BB-‘ from ‘BB’;

– VIPFA subordinate lien matching fund revenue bonds to ‘BB-‘ from ‘BB’;

-VIPFA matching fund revenue bonds (Diageo project) to ‘BB-‘ from ‘BB’;

-VIPFA matching fund revenue bonds (Cruzan project) to ‘BB-‘ from ‘BB’;

-VIPFA gross receipts tax (GRT) revenue bonds to ‘BB-‘ from ‘BB’.

According to Fitch, a "BB" rating is "speculative," but not "highly speculative." Fitch has placed the ratings on a negative watch, meaning it may consider reducing the rating further, unless something changes to suggest a more positive outlook.

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