The Virgin Islands Public Finance Authority Tuesday will sell $39.4 million of tax-exempt rum-tax bonds to help finance a new wastewater facility plant on St. Croix for spirit-maker Cruzan VIRIL Ltd.
Officials anticipate selling an additional $66 million of tax-exempt rum-tax bonds in the next couple of years to support additional upgrades to the Cruzan facilities. In return for the capital financing, the rum-maker agrees to continue producing rum in the USVI for 30 years.
Citi will price the new-money debt. Hawkins Delafield & Wood LLP is bond counsel. Fiscal Strategies Group is the financial adviser for the authority.
The Series 2009A Cruzan Project bonds will offer serial maturities from 2010 through 2019. Three term bonds include $5 million of debt maturing in 2024, $6.6 million of bonds maturing in 2029, and $20.9 million of debt maturing in 2039, according to the preliminary official statement.
The Cruzan Project bonds are subordinate to $477.8 million of prior senior and subordinate rum-tax bonds sold under the territory’s 1998 indenture. The authority also has $250 million of Diageo Project bonds that helped finance a new distillery for Diageo PLC, which makes Captain Morgan rum. The Diageo bonds and the Cruzan bonds are parallel to each other and both will receive rum-tax receipts after debt service costs on debt issued under the 1998 indenture are met, according to David Paul, an adviser at Fiscal Strategies.
The rum-tax receipts flow first to the authority’s senior bonds and then to its $97.5 million of subordinate debt before any rum-tax revenues go to pay down debt service costs on Diageo and Cruzan bonds.
Fitch Ratings rates the Cruzan Project bonds BBB-minus, the same rating it applies to the Diageo Project bonds. That is also the same rating the agency applies to $97.5 million of Series 2009C subordinate-lien bonds sold under the 1998 indenture. While the $97.5 million of debt gets paid off before the Diageo and the Cruzan bonds, Fitch assigns the bonds the same rating of BBB-minus.
Fitch believes the strength of the nearly 50-year federal rum-tax program and the smaller size of the subordinate lien bonds, $97.5 million, garners an investment-grade rating on the Cruzan and the Diageo bonds.
“We didn’t think that the strength of the subordinate lien on the senior indenture were significantly greater for the two grant-related indentures, for the Cruzan indenture and for the Diageo indenture,” said Fitch analyst Doug Offerman.
Fitch rates the senior bonds BBB.
Moody’s Investors Service rates the $97.5 million of subordinate debt Baa2 —the same rating it gives the senior bonds — and assigns its Baa3 rating to the Series 2009A Cruzan bonds. It also rates the Diageo bonds Baa3.
USVI and Puerto Rico, both rum producers, currently receive $13.25 of a $13.50 per proof gallon tax that rum distributors pay to the U.S. government each year. The rum-tax revenues are sometimes called matching fund revenues or cover over revenues. The $13.25 rate will expire on Dec. 31 and if Congress does not approve to extend the $13.25 rate by the end of the year, that amount will revert back to a base rate of $10.50.
Unlike the Diageo bonds, the Cruzan bond proceeds will help upgrade a facility that is already in operation and producing rum. Diageo is moving production of its Captain Morgan rum from Puerto Rico to the USVI, with the territory anticipating receiving Captain Morgan rum receipts beginning in fiscal 2012.
“These [Cruzan bonds] are payable from the revenue stream that has been very strong and continues to grow from the existing distillery,” Paul said. “It’s very much unlike the Diageo transaction in that there’s no construction period, there’s no capitalized interest, the facility’s up and running. So, it’s more of a straight-forward dedicated tax bond related to the Cruzan revenue stream and I think from that standpoint it’s a strong credit. And many institutional investors hold the senior bonds and are very familiar with this revenue stream.”
One potential risk to Diageo and Cruzan’s bond structure is federal legislation filed by Puerto Rico’s resident commissioner, Pedro Pierluisi. The measure would limit subsidies that Puerto Rico and the USVI extend to rum-makers to 10% of rum-tax receipts. The bill sits in the House Committee on Ways and Means.
“If the proposed legislation were in effect today, a portion of the benefits to be received by Cruzan and Diageo USVI from the government under the Cruzan agreement and the Diageo agreement, respectively, would be inconsistent with the law,” according to the POS.
The bill has yet to taken up in committee.
“We did review that issue very carefully and felt that it’s certainly something that’s worth noting and is worth monitoring,” Offerman said. “But we didn’t feel there was a strong likelihood of this legislation going through.”
IWSR, a data provider on wine and spirit consumption, estimates global rum consumption to increase modestly over the next five years, with the U.S. projected to contribute to that growth.
“Overall rum and cane have grown by 0.6% compound annual growth rate between 2003 and 2008 and growth will accelerate over the next five years to 0.8%, driven by Brazil, the U.S. and the Philippines,” according to a Nov. 19 press release.
