Moody’s, one of the three major bond ratings agencies, announced this week it has downgraded the four existing sets of bonds secured by federal rum excise tax revenues in the U.S. Virgin Islands. The downgrade is just days after the Fitch rating agency downgraded both the Internal Revenue Matching Fund bonds secured by rum revenues and bonds secured by V.I. gross receipts tax revenues. (See Related Links below)
All three agencies – Moody’s, Fitch, and Standard and Poor –downgraded the territory last year. This new round of downgrades appears to be triggered by a lack of action on the territory’s structural deficit and the V.I. government’s unsuccessful recent attempt to sell new bond debt to balance this year’s budget.
Moody’s adjusted USVI senior lien bonds to Caa1 from B1; subordinate lien bonds to Caa1 from B1; subordinated indenture (Diagnose) Bonds to Caa2 from B2; and Subordinated Indenture (Cruzan) Bonds to Caa2 from B2. The bonds are secured by matching fund revenues, which are remittances paid by the federal government to the Virgin Islands government of a portion of federal excise taxes collected on rum produced in the territory and shipped to the U.S. mainland.
The rating action affects roughly $1.16 billion in outstanding debt, according to Moody’s.
The Ca rating means Moody’s judges the bonds "to be speculative of poor standing and are subject to very high credit risk." The numeral "1" means it is at the better end of the Ca range. Moody’s could downgrade further, to Caa2 or Caa3, before considering the next level, which would be "Ca." A Ca rating, which, to be clear, would be several grades below the territory’s current rating, indicates bonds are "likely in, or very near, default," according to Moody’s.
According to Moody’s, the downgrades are due to the territory’s "extremely weak financial position and liquidity; its apparent failure to access the capital markets for a planned deficit financing, which would have balanced the current year budget and bolstered liquidity levels; and an increased possibility that the government may be forced to restructure its debt to address its financial problems."
The agency says the V.I. government has persistent General Fund deficits that it has primarily addressed with more and more borrowing, very high debt levels, shrinking gross domestic product, a shrinking population, and high unemployment.
Moody’s also pointed to the government’s "extremely large unfunded pension liability," and the fact the retirement system "is projected to become insolvent by fiscal 2023."
On the positive side, Moody’s pointed to the government’s putting in a statutory lien, directly pledging rum revenues to a special trustee before the territory sees the funds, along with other structural features protecting lenders. But they say it is not clear if those provisions will really hold, if push comes to shove and the government does not have the funds to "provide basic services."
They said they "believe they do not protect bondholders in the event that the government is forced to restructure its debt."
Moody’s has the USVI on a negative rating outlook, meaning they may downgrade further.
Moody’s announcement says "restoration and maintenance of structural budget balance by the primary government" could lead to a future upgrade, but any worsening of the government’s financial position or any reduction in rum revenues could lead to another downgrade.