Officials in the U.S. Virgin Islands are gearing up to welcome production of Captain Morgan rum to the territory as plans for financing a distillery project moved forward last week.
The Virgin Islands Public Finance Authority Thursday approved $50 million of short-term notes as spirits maker Diageo will begin the design phase of a new rum distillery on St. Croix. Diageo filed permits for the project last week and once the 60-day permitting process is complete, the authority will look to issue $250 million of long-term tax-exempt bonds backed by future rum receipts to help support the project. The VIPFA approved the borrowing plan in 2008 after it received legislative approval.
Diageo currently produces its Captain Morgan rum for the U.S. market in Puerto Rico through a third-party distiller, Destileria Serralles, in Ponce, P.R. Diageo's contract with Serralles will end in 2012.
While the authority plans to offer the $50 million of one-year notes via private placement in the first quarter, it is hoped the larger bond transaction will come to market by late winter or in the spring, according to Julito Francis, VIPFA's director of finance and administration.
"We're doing all of the discussions right now for the offering statement and the like, and also potentially making our road trips to the rating agencies so that we can expedite the process once the permits are in place," Francis said. "Hopefully it will be somewhere in the second quarter, towards the latter part of the first quarter at the earliest."
Newspaper reports last week indicated that a pending lawsuit between Bennington Foods LLC and St. Croix Renaissance Group LLP may halt the bond sale or construction of the new distillery. That litigation involves land adjacent to Diageo's new plant. Diageo and Jean Greaux, spokesman for Gov. John deJongh, said the lawsuit will not affect the new development. Diageo last week entered into an 11-year land lease with St. Croix Renaissance on 26 acres of land.
"Pending litigation in the case of Florida-based Bennington Foods versus St. Croix Renaissance will have no impact whatsoever on Diageo USVI's plans to build and operate a rum distillery on the currently undeveloped property owned by SCRG in St. Croix," Kellye Walker, president of Diageo USVI Inc., said in a press release.
JPMorgan and Citi will price the $250 million transaction. Hawkins, Delafield & Wood LLP is bond counsel. Fiscal Strategies Group Inc. is the authority's financial adviser.
The 60-day permitting process may help the VIPFA once it is ready to price the bonds because the additional time could allow for greater thawing of the credit markets and potentially bring more stability to the volatile municipal market.
"We're not going to be in a position to issue the bonds until the permits for the projects are in place and then we'll consider the market issues down the road when we're actually in a position to go to market," said David Paul, an adviser at Fiscal Strategies.
Francis said the long-term transaction will offer 30-year, fixed-rate bonds because the authority prefers to stay away from variable-rate debt. Officials are evaluating insurance but will sell the debt without enhancement if possible.
"That's always something that is reviewed, as to whether or not that will have a positive impact, and if not, then there's no need to," Francis said.
Keeping the project on track is necessary as government officials anticipate that additional rum-tax revenues will begin to flow into the territory's coffers in 2012. Any delays to the new distillery could postpone the arrival of those expected revenues because rum must age for at least 12 months.
"Right now we're on track to meet our goals of having the distillery ready to have rum that is ready for shipment to the U.S. in the beginning of 2012," said Diageo spokeswoman Zsoka McDonald.
Officials estimate that the Virgin Islands will begin receiving about $119 million of additional rum tax revenue in fiscal 2012, which begins Oct. 1, with that amount expected to increase to $226 million in fiscal 2027, according to financial analysis data from Fiscal Strategies. By comparison, the government anticipates receiving $20.5 million of rum tax receipts in fiscal 2009 from its sole rum maker, Pernod Ricard, which manufactures Cruzan Rum.
Of the new rum revenue from Diageo, the territory will dedicate $18.4 million annually to pay off principal and interest on the $250 million deal.
Fitch Ratings analyst Douglas Offerman said the additional revenues will strengthen the government's coffers, but are still a few years away.
"Obviously the project is a multiyear one and it's going to take some time for it to come to fruition, and there's risk in any project that size," Offerman said. "But assuming the project moves forward, it can only benefit the economy of the islands and it certainly helps the government's revenue picture."
The Virgin Islands have roughly $590 million of outstanding general obligation bonds. Fitch and Standard & Poor's rate the credit BBB-minus, while Moody's Investors Service rates it an equivalent Baa3.
The Public Finance Authority has about $470 million of outstanding rum bonds, according to Francis, which carry BBB and Baa3 ratings from Standard & Poor's and Moody's, respectively. Fitch does not rate the rum debt.
Diageo is moving to the islands as global rum consumption is expected to increase, even during a recession. IWSR, a data provider on wine and spirit consumption, said in a January report that it anticipates global rum sales to increase by 5.8% by 2012, with 235.2 million nine-litre cases of rum forecasted to sell that year compared to 222.3 million cases consumed in 2007. Overall, IWSR anticipates alcohol sales to remain steady over the next couple of years.
"Whatever its critics might wish, the world will continue to use alcohol," according to the report. "The type of alcohol may change in times of recession, but overall consumption patterns will be largely unaffected."
Along with the $50 million short-term note deal, authority officials weighed in on $400 million of gross tax receipts borrowing that will support public works projects throughout the territory during the next few years. The VIPFA revised the bonding slightly by removing specific infrastructure plans to open up the bond proceeds to all capital improvement needs.
The $400 million of bonding must receive legislative approval and officials anticipate selling $100 million of the bonds in the second quarter. JPMorgan and Citi will price that debt as well, according to Paul.