The bonds are expected to sell via negotiation the week of
Additionally, Fitch takes the following actions on the ratings of the USVI:
--Implied general obligation (GO) bond for the USVI downgraded to 'BB-' from 'BB'. There are no outstanding stand-alone GO bonds of the USVI.
The Rating Outlooks remain Negative.
The GRT revenue bonds issued by VIPFA are secured by a pledge of GRT collections from the USVI deposited to the trustee for bondholders prior to their use for general purposes. The bonds also carry a GO pledge of the USVI.
KEY RATING DRIVERS
GRT SECURITY INSULATED FROM GOVERNMENT OPERATIONS: Bonds issued by the VIPFA and secured by the GRT have been insulated from general fund operations through a collection process that allocates pledged revenues to a separate escrow account. Debt service coverage remains satisfactory although it will be reduced by debt service associated with the current issue combined with expected weak future revenue trends. The Negative Outlook on the GRT bonds reflects the weak USVI economy and concern that the USVI will over-leverage this revenue source.
ECONOMIC AND FINANCIAL STRAIN RESULT IN IMPLIED GO DOWNGRADE: The downgrade of the implied GO rating to 'BB-' from 'BB' and maintenance of the Negative Outlook reflect severely strained fiscal operations and the intractability of longer-term fiscal challenges that are compounded by acute economic difficulties.
WEAK FINANCIAL POSITION: Longstanding fiscal challenges worsened in the recent downturn with sharp revenue declines, prolonged, unresolved property tax litigation, high fixed-cost burdens, and difficulty in reducing expenditures. These fiscal challenges were compounded by the closure of
HIGH DEBT AND LIABILITY BURDEN: Net tax-supported debt is extremely high, and dedication of revenues to debt service reduces fiscal flexibility. Other liabilities for pensions and unpaid retroactive salaries further weigh on the territory's limited resources.
NARROW ECONOMY: The economy is limited, dependent on tourism and vulnerable to disruption from natural disasters.
STABILITY FROM U.S. TERRITORY STATUS: Although the USVI enjoys less flexibility in fiscal matters than U.S. states, the U.S. legal and regulatory environment provides some stability.
--FOR THE GRT BONDS: A reduction in expectations for GRT revenues; leveraging that notably reduces debt service coverage ratios; further economic erosion in the USVI.
--FOR THE IMPLIED GO RATING: Further erosion in the USVI's financial position and/or deterioration in the USVI's economy; continued issuance of working capital borrowing for operations; failure to stabilize pension funding.
The 'BBB' rating on the GRT bonds reflects the structure's legal protections and satisfactory coverage of debt service by pledged revenues. GRT bonds are secured by the USVI's pledge of GRT revenues with all collections deposited daily to a special escrow account. With the exception of a small required payment for housing, all revenues are allocated to the trustee for the benefit of bondholders, only after which are remaining receipts available for general purposes. The priority claim of bondholders to GRT collections and other structural protections insulate bondholders from the USVI's broader fiscal stress and support a rating level that is higher than the GO rating.
The downgrade of the implied GO rating to 'BB-' from 'BB' incorporates the significant financial and economic pressures faced by the USVI. A severely unbalanced operating budget has led to multiple years of borrowing to fund ongoing operations and reported operating deficits;
COVERAGE OF GROSS RECEIPTS TAX BONDS REMAINS SATISFACTORY
The USVI increased the GRT tax rate to 5% from 4.5%, effective
Senior lien debt service coverage from fiscal 2013 cash collections was 3.57x; when including unrated, junior lien obligations, combined debt service coverage was 3.33x that year. Coverage of maximum annual debt service (MADS) on all GRT-secured debt was 2.67x by fiscal 2013 revenues. The USVI is forecasting 1.9% growth in GRT collections for fiscal 2014 although collections through the first two quarters of the fiscal year are down year-over-year (yoy) by 7.3%. Fitch estimates that a 7.3% decline in fiscal 2014 revenues would produce still solid annual debt service coverage on senior lien debt in fiscal 2014 of 2.79x while coverage of all-GRT debt would approximate 2.5x. Coverage of MADS from the Fitch-adjusted fiscal 2014 forecast indicate a MADS coverage level of about 2.19x.
Security features include an additional bonds test requiring 1.5x MADS coverage by historical and prospective revenues, a debt service reserve funded at MADS, and covenants precluding tax rate reductions or the granting of excessive tax incentives. Additionally, should a 1.5x MADS coverage level be reached in any 12-month period, the USVI has covenanted to seek out additional revenue to pledge to the bonds. With the rate increase to 5% in
USVI FINANCIAL AND ECONOMIC CHALLENGES EXPECTED TO CONTINUE
The downgrade of the implied GO rating to 'BB-' incorporates Fitch's view that the USVI will continue to have difficulty achieving ongoing structural budget balance in the context of revenue losses due to longstanding fiscal constraints, high fixed costs, and very high liabilities, and the loss of its largest taxpayer and employer. The USVI has had limited flexibility in responding first to the economic downturn and now to an economy that is hampered by employment losses from the
USVI revenue collections are subject to significant volatility. After several years of robust economic and revenue growth, general fund revenues plummeted in the recession, with GAAP-basis fiscal 2009 falling 29% from fiscal 2008, to
For fiscal 2011, appropriations continued to exceed projected revenues and the governor sought substantial mid-year spending cuts and an increase in the GRT rate to balance the budget. The GRT rate increase to 4.5% provided some budget relief, an 8% salary rollback for certain USVI employees was implemented, effective
Following the enactment of the fiscal 2012 budget, the governor's office forecast a
For the fiscal year ended
The USVI expects operations in the current fiscal 2014, inclusive of the additional
LIMITED ECONOMY WITH HIGH UNEMPLOYMENT
The USVI is an organized, unincorporated U.S. territory with a population of 106,000. The economy is small, narrow and subject to considerable volatility. Tourism and related industries represent approximately 80% of economic activity, although other activities, notably rum distillation are prominent, and government employment equals more than a quarter of jobs. Prior to its closure and conversion to a storage facility in
Tourism indicators have begun to stabilize after sharp, recession-related declines in 2008 and 2009, although the economic recovery appears to be unsteady and further improvement will be linked to broader economic trends in the U.S., from which the majority of USVI visitors originate. While cruise ship visitors to the USVI have recently increased, growing 4.9% between
DEBT AND UNFUNDED LIABILITIES ARE EXTREMELY HIGH
The USVI's liabilities are extremely high relative to U.S. states. Tax-supported debt totals about
Persistent underfunding has led to a large pension liability, with a funding ratio of 45.3% as of
Additional information is available at 'www.fitchratings.com'.
--'Tax-Supported Rating Criteria' (
--'U.S. State Government Tax-Supported Rating Criteria' (
Tax-Supported Rating Criteria
U.S. State Government Tax-Supported Rating Criteria
Marcy Block, +1 212-908-0239
Douglas Offerman, +1 212-908-0889
Laura Porter, +1 212-908-0575
Source: Fitch Ratings
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