NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns a 'BBB' rating to the following revenue bonds of the Virgin Islands Public Finance Authority (VIPFA):
--$51.33 million revenue refunding bonds (Virgin Islands matching fund loan note), series 2013B (senior lien).
The bonds refund outstanding senior lien matching fund revenue bonds for debt service savings and sold via private placement on Sept. 30, 2013.
The Rating Outlook is Stable.
SECURITY
Special, limited obligations of VIPFA payable from and secured by a pledge of and lien on the trust estate of the senior lien indenture, primarily matching fund revenues associated with the Cruzan and Diageo facilities located on the U.S. Virgin Islands (USVI).
KEY RATING DRIVERS
ESTABLISHED PLEDGED REVENUE STREAM: Matching funds are an established revenue stream based on federal law derived from substantially all excise taxes imposed and collected on certain products produced and exported to the U.S.; primarily rum. As the matching fund revenues are not an appropriated revenue source of the U.S. government, they did not fall under the provisions of the recent U.S. federal funding sequestration.
RECENTLY REVISED PLEDGED REVENUE FORECAST WEAKENS SECURITY: The final form of the verification and revenue report issued in conjunction with the recent offering of series 2013A matching fund loan notes was revised substantially from prior forecasts of IHS Global Insight. The revision corrects errors made in calculating the receipt of matching fund revenue from Diageo production and lowers expected total matching fund revenue starting in fiscal 2013 (year ended Sept. 30, 2013) by an annual average of 11.8% through the life of the bonds.
ADEQUATE DEBT SERVICE COVERAGE: Maximum annual debt service (MADS) coverage from fiscal 2013 pledged revenues (at the $13.25 cover over rate) for the senior indenture is estimated at 2.78x; MADS coverage for all debt service obligations in aggregate is expected to approximate 2.18x. U.S. Congressional failure to extend the current $13.25 cover over rate, set to expire on Dec. 31, 2013, would weaken coverage margins.
INSULATION FROM USVI OPERATIONS: Bond security is well-insulated from the financial operations of the USVI (implied general obligation bond rating of 'BB' with a Negative Outlook by Fitch). However, much of the leveraging of this revenue source has been to support General Fund operations of the USVI, and Fitch believes further leveraging is likely to absorb future excess matching fund revenues. Payments made by the U.S. Treasury are transferred to escrow for payment of debt service on matching fund revenue bonds prior to being made available to the USVI for other purposes.
DEPENDENCE ON RUM PRODUCTION: Payment on the bonds is ultimately dependent on continuation of rum production at both facilities, which itself is linked to continuation of the federal matching fund program and the availability of incentives and production subsidies from the USVI. Future revenue trends may be affected by changes in consumer tastes or purchasing habits.
RATING SENSITIVITIES
--Interruption of rum production or U.S. support for the present cover over program;
--A discontinuation of the higher cover over rate of $13.25 which could lead to possible credit erosion;
--Changes in consumer tastes or purchasing habits that significantly reduce rum consumption in the U.S.;
--An overextension of this revenue source to fund capital and operating needs of the USVI that significantly weakens debt service coverage.
CREDIT PROFILE
For additional information on the USVI's matching fund revenue bonds, please see 'Fitch Downgrades Virgin Islands' Matching Fund Bonds; Outlook Stable' dated Aug. 29, 2013 and available on Fitch's web site at fitchratings.com.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. State Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. State Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686033
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=803917
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