Virgin Islands Echoes Puerto Rico as Utility’s Bonds Cut to Junk

Another U.S. territory is sliding into junk-bond status.

The Virgin Islands Water and Power Authority, the Caribbean archipelago’s utility, had the credit rating on its most secure debt cut below investment grade Wednesday by S&P Global Ratings. The rating company cited its low levels of cash and a backlog of unpaid bills, some owed by the government.

"The downgrade reflects weakened debt service coverage and liquidity, due in part to delayed payments on government-related accounts," said S&P credit analyst Peter Murphy in a statement.

The Virgin Islands, with about 100,000 residents, is contending with some of the same forces that pushed nearby Puerto Rico into a cascading series of defaults: a declining population, retirement-fund debts and a history of borrowing to cover budget shortfalls. Its $2.4 billion of debt, issued by various arms of the government, amounts to some $23,000 per person, even more than Puerto Rico’s $20,000.

The pressure on the utility is also similar: The Puerto Rico Electric Power Authority, squeezed in part by unpaid bills from government agencies, struck a deal with creditors in December to restructure its debt.

The Puerto Rico crisis prompted the U.S. government to step in last month, when President Barack Obama enacted a law that gives that island legal power to reduce what it owes, similar to how U.S. cities have in bankruptcy.

Virgin Islands officials opposed the legislation, and the agency that does much of the government’s borrowing remains investment grade. But the federal intervention rattled investors by setting a precedent for a territory to write off debts once seen as legally iron clad, causing Virgin Islands bonds to tumble 17 percent this month, according to S&P’s index.

S&P considers the water and power authority’s finances to be "somewhat vulnerable," with accounts receivable at the end of fiscal 2015 of $45 million, or 17 percent of operating revenues. While the agency has since cut that roughly in half, the credit-rating company said liquidity remains weak.

The utility has $231 million of debt outstanding. S&P cut the grade of senior debt by one step to BB+, a notch below investment grade. Subordinated securities were downgraded two steps to BB-. S&P said that outlook is negative, indicating it could be lowered again.

Molly Smith
Virgin Islands Echoes Puerto Rico as Utility’s Bonds Cut to Junk