Virgin Islands Finance Authority Readies $250M of Rum-Tax Bonds

The Virgin Islands Public Finance Authority next week will price $250 million of tax-exempt rum-tax bonds that will be subordinate to the agency's outstanding $477.8 million of senior rum-tax bonds.

The subordinate transaction will help finance a new distillery in St. Croix for Captain Morgan brand rum, which is owned by Diageo PLC. Officials broke ground on the project in early May.

Better market conditions prompted the authority to sell the bonds next week instead of entering into a short-term financing plan and waiting for a potentially stronger bond market in the fall. The bonds are set to price early to mid-week next week, with no current plans for a retail-order period.

JPMorgan is book-runner and Citi is co-senior manager on the deal. Hawkins, Delafield & Wood LLP is bond counsel. Fiscal Strategies Group Inc. is the authority's financial adviser.

"The long-term financing was always the goal," said Jim Kelly, executive director at JPMorgan. "And when the authority felt they were comfortable with the market, they decided to pursue the long-term financing as opposed to the short-term financing."

Series 2009 bondholders will receive annual debt service payments after yearly principal and interest costs on the $477.8 million of senior rum-tax bonds are met. In addition, the VIPFA may issue future senior rum-tax bond sales.

"Such senior bonds have a lien on matching fund revenues, including the Diageo matching fund revenues, that is superior to the lien securing all bonds issued pursuant to the subordinated indenture," according to the preliminary official statement. "The authority plans to issue additional senior bonds to provide funds to pay the cost of certain capital projects and/or working capital expenditures of the government."

James Lansing, managing director at JPMorgan, said potential investors on the subordinate deal may be similar to buyers of the senior rum-tax bonds.

The POS mentions federal legislation filed by Puerto Rico resident commissioner Pedro Pierluisi that would limit rum-tax subsidies to private companies at 10%, which could potentially undermine the USVI's agreement with Diageo. Puerto Rico expects to lose roughly $130 million in rum-tax revenue annually once Captain Morgan production is transferred to the USVI.

Pierluisi's bill has been referred to the House Committee on Ways and Means and is not scheduled for consideration, according to Matthew Beck, communications director and policy adviser to the committee.

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