USVI junk bond sale can’t clear the market; investors seek more security

12 January 2017

The United States Virgin Islands (USVI) has again delayed its USD 221m bond sale amid low interest, as investors seek greater security, said Andre Wright, the USVI’s external advisor at Standard International Group.

 

Underwriter Morgan Stanley got orders for USD 150m in bonds, about USD 125m of the almost USD 150m in seniors and USD 25m of the approximately USD 70m in subordinates, said a portfolio manager. Wright confirmed the numbers.

 

The low subscriptions came even after the USVI raised the yield on the bonds to 7.5% for the seniors, due in 2036 and to 7.75% on the juniors, as previously reported. Those yields are higher than December estimates from the USVI financial commissioner, average yields on junk debt, and yields on the secondary market.

 

“Even at those high yields they’re still not able to get enough interest because Puerto Rico taught investors a good lesson: if they can’t pay, they can’t pay,” said the portfolio manager.

 

Wright and the portfolio manager said that investors were seeking greater security for the bonds. One request was that Governor Kenneth Mapp sign an executive order that would strengthen the security by making permanent the transfer of the rum excise tax that backs the bonds to a lockbox that repays the debt. Currently the USVI’s governor has to request the transfer on an annual basis. The governor is considering the request, said Wright.

 

The USVI bonds are already more secured than the Puerto Rican bonds backed by the same tax, since the funding goes to a lock box and can’t be diverted, Wright said.

 

In Puerto Rico, the excise tax backed the Puerto Rico Infrastructure Financing Authority debt, and the money could be diverted to pay general obligation bonds if insufficient funds were available.

 

Wright said he still expects the bonds to be sold by the end of the month, and that no cash crunch is imminent.

 

Morgan Stanley and the Virgin Islands Public Finance Authority did not respond to requests to comment.

 

A USD 43.1m tranche of 5% Series 2009A-1 senior lien matching fund loan notes due in 2039 last sold in odd lots on 4 January at 82, yielding 6.529%, according to Electronic Municipal Market Access. S&P Global Ratings last rated the bonds BB/negative in December 2016; Moody’s Investors Service rated the debt B1/negative in June 2016 and Fitch Ratings rated the debt BB/negative in November 2016.