There’s a New Muni-Debt Crisis Brewing in Another U.S. Territory
(Bloomberg) -- An economically struggling U.S. territory. A government-run electricity provider facing potential insolvency. A debate among public officials about whether debts are too burdensome to pay.
That’s the situation in the U.S. Virgin Islands, where the power agency is contending with a financial squeeze that echoes what happened in Puerto Rico in the run up to that government’s record-setting bankruptcy.
The uncertainty led Moody’s Investors Service on Sept. 23 to downgrade the most senior Virgin Islands Water and Power Authority bonds to eight steps below investment grade, indicating a high likelihood of default. Subordinate debt due in 2031 last traded at an average of 92 cents on the dollar, above the 65% to 80% recovery that Moody’s rating suggests investors are likely to receive.
The risk of default has increased due to WAPA’s “unsustainable capital structure with very tight liquidity, high debt load including a substantial unfunded pension liability, the increased frequency of power outages, reducing the reliability of the electric system, high electric rates, and chronic challenges facing the economy,” Moody’s said in a report.
Governor Albert Bryan Jr. says the government is “steadfast” in making sure that the utility’s bills are paid. But the territory’s Congressional representative says its debt may need to be restructured, clouding the outlook for investors who own $227 million of the authority’s bonds.
The saga resembles a small-scale repeat of what happened to the Puerto Rico Electric Power Authority, which went bankrupt in 2017.
WAPA serves about 55,000 electric customers and 12,000 water customers in the territory, according to a 2017 financial statement, and about 90% of the utility’s electrical grid was damaged by hurricanes two years ago.
A 2018 report by the nonpartisan Congressional Research Service said the costs of rebuilding and modernizing the territory’s electric grid likely “far exceeds” the financial ability of the territory, where electric prices are already three times higher than the average in U.S. states. The Virgin Islands overall, which has also seen its credit-rating slashed to junk, is struggling under high pension debt and a declining economy.
Stacey Plaskett, the territory’s representative in Congress, last month said she’s concluded the utility is “effectively insolvent” after speaking with the authority and financial experts.
In a Sept. 18 letter to the governor, she said the utility may need “federal court intervention” because its operations are “under duress by several of its vendors/creditors.” A court intervention could help adjust the utility’s debts, she said.
James Spiotto, an expert in municipal bankruptcies, said Congress would have to act to allow the agency to go through the bankruptcy-like process that Puerto Rico is using to restructure its debts. If there’s a default, bondholders could also move to appoint a receiver and work on a recovery plan for the utility to make its debt more sustainable, he said.
Plaskett’s letter was a “wake-up call” about the condition of the utility, Spiotto said.
“Keeping the lights on isn’t just a nice thing to say, it’s very important,” he said.
But Lawrence Kupfer, executive director of the authority, disputes Plaskett’s characterization. He said in a statement that he didn’t see the need for declaring a state of emergency, calling Plaskett’s comments a “slap in the face” to employees trying to restore power. The statement didn’t address the utility’s debt.
Jean Greaux, spokesman for the authority, didn’t respond to requests for comment on the utility’s debt.
Governor Bryan isn’t calling for a restructuring and instead supports looking for opportunities to refinance its obligations, said Karl Knight, chief of staff.
Virgin Islands lawmakers will discuss the utility at a hearing Tuesday. Senator Myron Jackson said the territory has long struggled with energy issues that he proposed legislation for in 2013.
He said he wasn’t prepared to say whether he supported a debt restructuring until after the legislative hearing on the utility. “You have businesses that cannot conduct their daily transactions,“ he said. “The impact has been very negative to the territory.”
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