The price of some U.S. Virgin Islands bonds’ on the secondary market has more than doubled since the end of last year.
According to the Electronic Municipal Marketplace Access web site, on Dec. 28, 2017, a customer bought $2 million of Virgin Islands gross receipts tax bonds maturing in 2039 at 44 cents on the dollar.
On Thursday a customer bought $1 million of the bonds at 95 cents on the dollar.
The islands’ rum tax bonds have also shot up. According to EMMA on Jan. 2 a customer bought $1.5 million of Virgin Islands matching fund bonds maturing in 2024 at 63 cents on the dollar. On Oct. 5 another customer bought $1.05 million of the bonds at 100.625 cents on the dollar.
The rise in the bonds’ market bonds is “a reflection of increased investor confidence in the Virgin Islands,” said Richard Tortora, president of Capital Markets Advisors. Capital Markets is the municipal advisor to the U.S. territory.
The two category 5 hurricanes that hit the Virgin Islands in late summer 2017 were factors in the slip of its bond prices later in the year, he said. But the government made full bond payments on Oct. 1, 2017, April 1, and this past Oct. 1, he said.
The island’s economy is largely reliant on rum production and tourism. The hurricanes have had limited impact on rum production and rum production facilities, Tortora said.
While tourism was initially hit hard, cruises have returned fairly strongly, Tortora said. Airline-based tourism hasn’t come back quite as much because some hotels are still closed. Yet tourism is on the path to normal levels.
The U.S. Virgin Islands was quicker than Puerto Rico in bringing back its electrical and water infrastructure, Tortora said.
The Virgin Islands have also benefited from not being hit by any major storms this season, he said. The season ends at the end of November.
Finally, Tortora said there was widespread interest in high-yield paper.
Triet Nguyen, Axios Advisors managing partner, said the recovery in Virgin Island bonds was helped by developments in Puerto Rico.
“We believe the rebound in the Virgin island bonds was in sympathy with the improved outlook for Puerto Rico bonds, now that a settlement between the general obligation and COFINA [Puerto Rico Sales Tax Financing Corp.] bondholders is in sight," Nguyen said. "It also reflects the recognition that the USVI government has displayed a more creditor-friendly attitude and a much more professional approach to managing its debt problem than its Puerto Rican counterpart.”
The closing of the islands’ St. Croix oil refinery in early 2012 cost 2,000 workers their jobs and pushed the islands into an economic decline that lasted through 2016. In July the Virgin Islands Senate passed a $1.4 billion deal to reopen the oil refinery on St. Croix.
On Oct. 5 Gov. Kenneth Mapp signed a fiscal year 2019 budget. The Virgin Islands fiscal year started on Oct. 1.
The budget has $1.0725 billion in local, transfer and other funds and $238.7 million in federal sources. In the coming fiscal year, “Revenue lost by the tourism industry through the temporary closure of the territory’s major hotels will be partially offset by the revenues derived from the reconstruction boom,” according to a statement from the governor’s office.
This year’s budget projects $1.311 billion in revenues, compared with $1.278 billion in the fiscal 2018 budget, according to Julio Rhymer, director of the Virgin Islands Office of Management and Budget.
The government has already drawn $215 million of a federal Community Disaster Loan approved after the hurricanes. It may or may not draw on the remaining $81 million available, Rhymer said.
The Community Disaster Loan, Federal Emergency Management Agency, Community Development Block Grant, and other federal aid after the hurricanes are not included in the island’s official budget, Rhymer said.
“As a result of economic activity in the U.S Virgin Islands during the past six months we are expecting the largest gross receipts tax collection in years at $191.3 million, $452.9 million in income taxes and $63 million in real property taxes,” said Finance Commissioner Valdamier Collens.
The one ratings agency that is still covering the central government’s bonds, Moody’s Investors Service, is skeptical. In January it downgraded its rating on the matching funds (rum tax) bonds to Caa3 and said there was a “high likelihood” of a government default on the bonds. When Moody’s was contacted in July, its analyst said that the opening of the oil refinery was likely to have only a minimal impact on the territory’s finances.
On Friday the Virgin Islands Water and Power Authority posted a financial notice to EMMA that said that it “anticipates” replacing a subordinated bond anticipation note due Nov. 15, with a senior BAN maturing July 1, 2020. WAPA also said it planned by mid-November to replace notes sold this year with senior lien bonds.
WAPA’s senior bonds are rated Caa1 by Moody’s Investors Service, CCC-plus by S&P Global Ratings, and CCC by Fitch Ratings.
WAPA has a $20 million line of credit with Banco Popular de Puerto Rico. It has a $20 million line of credit and a $15 million overdraft credit facility with FirstBank Puerto Rico.
WAPA also said it had drawn $52.2 million of $55 million in credit and overdraft credit facilities from the two Puerto Rico-based banks. First Bank has approved extending the deadline for repayment to Nov. 15 from Oct. 1. WAPA said it expects Banco Popular to follow suit with the same dates.
While the authority said it doesn’t have the money to repay the facilities in mid-November, it said the banks may extend the deadlines further once it releases its fiscal year 2017 financial statements. WAPA plans to do this by the end of October. The loans are subordinate to the bonds, according to Moody’s.
WAPA is now over its own mandated $500 million debt limit (about $216 million of this is bond debt). It is seeking approval from the Virgin Islands government for increasing this limit. It may have to secure this approval before selling the new notes or bond, said Dennis Pidherny, managing director at Fitch Ratings. WAPA’s financial release doesn’t say this.
Federal Emergency Management Agency “assistance has allowed management to focus on its operations and restore power to its customer base without putting additional pressure on the authority’s limited liquidity resources,” said Moody’s vice president Kathrin Heitmann.
WAPA’s financial notice said the Public Service Commission approved a roughly 4 cents per kWh increase for July through December of this year.
The authority said it planned to ask the PSC for surcharges and temporary rate increases to support various expenses. Additionally, the authority expects to “submit a full base rate case” to the PSC in early 2019.
