High-yield deal finances sale of ‘iconic’ Virgin Islands hotels

A $450 million unrated, triple-tax-exempt bond deal set to price next week will finance the sale of prominent Fortress Investment Group-owned resorts on the U.S. Virgin Islands to an Arizona-based nonprofit.

It’s a “big juicy high-yield deal,” said an investor who’s eying the transaction.

The financing marks the first use of a newly created USVI conduit issuer, the Virgin Islands Hotel Development Financing Corporation, which is not subject to the 35 investor limit that applies to certain deals. The property will be handed over to the USVI government after 30 years or the debt is retired, whichever comes first.

Together the resorts make up the USVI’s largest hotel and its second-largest private employer and are an “essential asset” to the government, said Brad Langner, managing director at Piper Sandler and lead banker on the deal.

“It’s an exciting story,” Langner said. “This is a marquee, iconic asset on the island. It’s a very unique structure with triple-tax-exempt bonds and lots of benefits for the USVI government.”

The $448.6 million of bonds — which are backed by net hotel revenues — are restricted to qualified investors and set to price Dec. 10 depending on market conditions. Piper has received “really good engagement” during the marketing period, Langner said. Among other features, the team is touting the “closed-loop indenture” that requires all excess profits go to pay down debt or fund reserves. “It’s a 100% self-contained indenture. That’s to protect the bondholders,” Langner said.

The transaction includes three tranches: $272.5 million of senior-lien hotel revenue bonds; $164.2 million of subordinate-lien bonds; and $12 million of federally taxable senior bonds. Separately, Fortress has agreed to buy $15 million of subordinate debt in a private placement if necessary, according to the preliminary official statement.

Originally opened in the early 1970s, the property was destroyed in 2017 by Hurricanes Irma and Maria. Fortress bought the properties in 2021 and spent $480 million on a major rebuild that featured Miami-Dade hurricane standards designed to protect against a category 5 storm. The rebuild was covered in part by the issuance in 2024 of $83 million of bonds that are backed by hotel occupancy taxes as well as USVI economic recovery fees. “This is such an essential asset for the USVI that they approved an economic incentive package to rebuild it,” Langner said.

The 2024 bonds will remain outstanding.

The hotels opened at the end of 2023 and are “doing well” but remain in a ramp-up phase, said Langner.

Despite the rebuild aimed at protecting against future hurricanes, a second investor predicted the deal would have to come with higher yield to compensate for weather risk facing the coastal properties, which are located in Frenchman’s Bay on the south side of St. Thomas.

“Maybe the odds aren’t as high but it’s still hanging out right on the coast of St. Thomas island,” the buysider said. “That’s a tough risk to take. I would think that they would have to offer a lot [of yield].”

The bond buyer added that the “muni market is financing Fortress out of that property.” The borrower, CFC-FR, LLC, consists of Arizona-based nonprofit Community Finance Corp. The CFC, which bills itself as existing “for the purpose of lessening the burdens of government and to erect, finance the erection of, or maintain public buildings, monuments or works,” also owns the Grand Hyatt in San Antonio, Texas, as well as several private prisons, according to its website.

A Fortress spokesperson did not comment by press time. CFC did not return a request for comment.

The deal comes after a few weeks of uncertainty in the high-yield market. High yield municipal mutual funds saw small inflows of $97 million for the week ending Nov. 26 after $142.1 million of outflows the week prior, according to LSEG Lipper.