Virgin Islands’ Water and Power Authority prices BANs at 9%

The U.S. Virgin Islands Water and Power Authority sold $35 million of bond anticipation notes at a high yield of 7% for tax-exempt notes and 9% for taxable notes.

WAPA closed the deal the week of Nov. 29.

High-yield investment giant Nuveen bought the $34.5 million of tax-exempt BANs and $500,000 of taxable BANs via a private placement. Immediately after the sale, Nuveen transferred the tax-exempt BANs to six of its tax-exempt funds and two of its taxable funds. The transfers are listed as trades on Electronic Municipal Marketplace Access.

The $34.5 million of exempt notes mature in July 2026 with a 6.75% coupon and yield 7%, noncall. The $500,000 of taxable notes have an 8.5% coupon and yield 9%, noncall. The notes are funded by fuel tax revenues.

No ratings were listed on deal documents or on the Municipal Securities Rulemaking Board EMMA site. WAPA’s electric system revenue bonds are rated Caa2 by Moody’s Investors Service and CCC by Fitch Ratings.

Investors are attracted to triple-tax exempt paper, said Michael Ross, director of MJR Consulting. Investors have been on the hunt for high-yield in the ultra low-rate environment and USVI and Puerto Rico issuers have been able to sell lower-rated or nonrated debt, but at a premium.

“The only real path to incremental success for some time has been looking longer out on the yield curve and lower in the credit spectrum,” said Eric Kazatsky, senior municipals strategist at Bloomberg Intelligence. “Through Dec. 9, buyers who waded into the lower credit range received more than 440 basis points of additional return. To put this outperformance into context, the average total return delta between the two indexes (LMB1TR and LMA3TR) has been just 136 basis points over the past decade. However, given absolute spread levels, we question how long momentum can be maintained.”

For the WAPA deal, part of the proceeds will be used to pay off the Finnish company Wärtsilä, which provided three propane-fired generating engines to WAPA’s Randolph Harley Power Plant in 2019. In March the company sued WAPA for failing to make the final due payment for the engines.

According to WAPA, due to this payment Wärtsilä agreed to drop the suit. Wärtsilä did not immediately respond to a request for a comment.

Proceeds from the sale also allowed WAPA to pay other sums owed to Wärtsilä and Scotland-based generator supplier Aggreko for operating and maintenance costs. The money will also be used to fund the associated debt reserve fund and the notes’ costs of issuance.

Sustainable Capital Advisors was the financial advisor. Duane Morris was the bond counsel. Essex Securities was the placement agent.

“The issuance of the BAN is symptomatic of the continued reliance of the utility on fossil fuels. This is a short-term fix at best but so long as the fossil fuel dependence exists, it’s a real problem credit,” said Joseph Krist, publisher of Muni Credit News. “The nature of the geography, the vulnerability of legacy grid equipment, and the exposure of the territory to climate issues all cry out for renewables based small or microgrid technology. Given the management structure and history, I would bet against a real sustainable transformation of this utility anytime soon.”

As of Dec. 31, 2020, WAPA had $190 million of electric system revenue bonds and $1.143 billion of liabilities, according to its unaudited financial statements.

Updated with Kazatsky comments.