Fitch, one of the top ratings firms in the United States, has become the latest to officially downgrade U.S. Virgin Islands bonds. The downgrade comes at an inopportune time for the Government of the Virgin Islands, which is in the middle of hearings by the 31^st Legislature on the FY 2017 Executive Budget which has left the Mapp Administration figuring out how to use floating bonds to meet a budget shortfall that now exceeds $110 million.

The news also comes about a month after Moody’s downgraded the Territory’s matching fund bonds. With the Fitch downgrade, U.S. Virgin Islands gross receipt tax bonds are now in trouble. Both types of bonds are now at B+, sending them deeper into the level of junk bond status. In addition, the U.S. Virgin Islands general credit rating (known as the issuer default rating) has also been downgraded to B+.

These downgrades present a real problem for the Territory, as they essentially make it harder and more expensive to float bonds to help cover its debt. In fact, Commissioner of Finance Valdamier Collens says that these measures mean the government will find it nearly impossible to restructure its debt effectively.

According to Fitch, U.S. Virgin Islands bonds do benefit from the possibility that the Virgin Islands Legislature will provide a statutory lien on the revenue streams for bondholders, a measure that would improve the recovery prospects for holders if the U.S. federal government allows for the restructuring of U.S. Virgin Islands-backed debt. However, if the Legislature fails to pass such a measure, the bond ratings could be downgraded even further.

Consequences stemming from Puerto Rico’s debt crisis

For a little context, before Congress passed the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), it was widely accepted that the U.S. Virgin Islands would have no way to restructure its debt. This resulted in a bond rating far above its issuer default rating.

Although PROMESA does not apply to the U.S. Virgin Islands, the passage of the law opens up the possibility that the Territory may be given the same powers as Puerto Rico sometime in the future. Because of this potential, Fitch and Moody’s have placed U.S. Virgin Islands tax bond ratings on what is known as “negative watch.”

Generally speaking, PROMESA, which was passed in July, limits Puerto Rico’s ability to offer attractive tax-exempt bonds and other incentives to the market, as investors are now faced with much more significant risk factors. This will likely lead to investors demanding higher interest rates and better returns. It appears that PROMESA is already having an impact on U.S. insular territories beyond Puerto Rico—even though the U.S. Virgin Islands debt situation has never been as bad as its Caribbean neighbor.

Business leaders and government officials throughout the U.S. Virgin Islands will be watching this situation closely in the weeks to come. If you have questions about how these developments could impact your company or your investments, be sure to consult a business planning attorney to discuss your options.

Attorney Tom Bolt is Chair of the Government Relations Practice Group at BoltNagi, a widely respected and established business and corporate law firm serving clients throughout the U.S. Virgin Islands.