BRADENTON, Fla. Standard & Poor’s placed a negative outlook on the West Virginia School Building Authority’s lottery revenue bonds Dec. 3 citing increased gambling competition from neighboring states.
S&P confirmed its AAA ratings on the Series 2008, 2009A, 2009B, and 2010A and B lottery bonds, as well as bonds issued by the Higher Education Policy Commission.
“The negative outlook reflects our view that there is a one in three chance that we could lower the rating within a two-year horizon,” according to analyst John Sugden. “While coverage remains strong at 4.7 times maximum annual debt service, we believe that there is the potential for additional declines in revenues as gaming operations in neighboring states are still ramping up.”
More states are turning to gambling as a new source of revenue while others like Florida are still studying whether to expand gambling.
In West Virginia, S&P said racetrack video lottery revenues declined by 32% in fiscal 2013 due to increased competition.
“Although the state is projecting coverage at 4.1 times in fiscal years 2014 and 2015, should revenues decline significantly and cause debt service coverage to fall below 4 times MADS, we could see increased pressure on the ratings at this level,” said Sugden.
Issuance of additional debt secured by lottery revenues will be an increasingly important credit factor, especially if competition results in significant revenue declines, he said.
Dilution of coverage levels, due to additional debt issuance or declining revenues or both, could place downward pressure on the ratings.
In fiscal 2013, total available state excess lottery revenues were $295.3 million, down $111.3 million from fiscal 2012. However, fiscal 2012 revenues were artificially high due to the inclusion of approximately $62 million in limited video lottery bid fees for permits.
S&P said without factoring in the nonrecurring permit fees, the reduction in overall revenues reflected a $45.6 million or 32% decline in racetrack video lottery revenues and a $3.5 million decline in limited lottery net revenues.
“In our view, these declines reflect increased competition from neighboring states,” Sugden said.
The triple-A ratings reflect solid historical coverage of debt service and strong debt service requirements despite declines in pledge revenues as well as strong oversight by the West Virginia State Lottery Commission.
State statutory provisions are good, and operational factors “reduce the likelihood of the West Virginia Legislature granting significant additional bonding authority against the revenue stream,” said the rating agency.
