The Virgin Islands Public Finance Authority will sell roughly $400 million of tax-exempt bonds Thursday backed by rum-tax revenues to help the U.S. Virgin Islands balance its fiscal 2010 budget.
The territory is addressing a revenue shortfall by reducing spending. It is also borrowing funds to help meet expenses by issuing bonds. Proceeds of its Series 2010A senior-lien and Series 2010B subordinate-lien bonds will be used to loan $150 million to the USVI’s general fund and refinance up to $200 million of outstanding bank loans that are due, according to the preliminary official statement.
Jefferies & Co. will price the rum-tax bonds on Thursday. Hawkins Delafield & Wood LLP is bond counsel. Fiscal Strategies Group is the outside financial adviser.
USVI is issuing $305 million of Series 2010A bonds, which include serial maturities from 2012 to 2020 with term bonds in 2025 and 2029. It is issuing $99 million of Series 2010B bonds, which include term bonds maturing from 2020 to 2029.
The Series 2010A and Series 2010B bonds are part of the authority’s 1998 indenture. Rum-tax revenues go toward repayment of its senior-lien and subordinate-lien bonds under that 1998 indenture before paying down outstanding rum-tax bonds the authority has issued to help finance new facilities for rum makers Cruzan VIRIL Ltd. and Diageo PLC.
Diageo, maker of Captain Morgan rum, plans to centralize production of that product in the the Virgin Islands after its distillery contract in Puerto Rico expires in 2011.
Moody’s Investors Service rates both the senior and subordinate bonds Baa2. Standard & Poor’s and Fitch Ratings rate the senior bonds BBB and BBB-plus and the subordinate bonds BBB-minus and BBB, respectively.
Fitch rates the the territory BB-plus, one notch below investment grade. Moody’s rates it Baa1, one notch above its Baa2 rum-tax rating. Standard & Poor’s rates the credit BBB-minus.
Rum producers pay a $13.50 per-proof gallon tax on rum made in the USVI and Puerto Rico for import to the mainland U.S. The two jurisdictions receive $13.25 of that federal rum tax. Puerto Rico is home to Bacardi rum.
The rating agencies noted that the actual consumption of rum will influence the credit’s rating. If the demand for rum declines, so would the rum-tax revenues.
“Future revenues may be affected by changes in consumer tastes or purchasing habits,” according to a Fitch report.
Congress is now weighing legislation limiting the amount of annual subsidies that a jurisdiction can pass on to rum producers to 10% of rum-tax receipts. Under current contracts, the authority’s yearly payments to Cruzan and Diageo exceed 10%. In return for those subsidies, the rum producers have pledged to remain in the USVI for a period of time.
USVI opposes the legislation, which Puerto Rico favors.
“Passage of the legislation in its current form would likely lead to a downgrade of the [rum-tax] credit and could have a negative impact on the general credit of the USVI,” according to a Moody’s report.
If Congress approves the 10% subsidy limit, USVI would be able to renegotiate with Cruzan and Diageo.
In September 2009, the territory established a three-year non-revolving credit facility with FirstBank Puerto Rico and Banco Popular de Puerto Rico for a combined $250 million, called a working capital credit facility. Up to $200 million of Series 2010 bond proceeds will pay down those outstanding bank loans. In May, the Legislature approved increasing the borrowing capacity of the credit facility to $500 million, according to the POS.
Gov. John deJongh on June 14 released his proposed $1.2 billion fiscal 2011 budget, which includes $781.9 million for the general fund. Fiscal 2011 begins Oct. 1. That spending plan includes tapping into $100 million from the credit facility, the POS says.
