The U.S. Virgin Islands Public Finance Authority today will sell $476 million of rum-tax bonds, including $95 million of new-money debt and another $381 million of current refunding bonds.
Citi is the book-runner on the transaction. Hawkins Delafield & Wood LLP is bond counsel. Fiscal Strategies Group is the financial adviser.
The new-money component consists of tax-exempt Series 2009A-1 senior bonds for $89 million and taxable Series 2009A-2 for $6 million. The tax-exempt refunding bonds include Series 2009B senior bonds for $278.5 million and Series 2009C subordinate bonds for $102.5 million.
Moody’s Investors Service rates the transaction Baa2. Standard & Poor’s assigns its BBB rating to the senior bonds and its BBB-minus rating to the subordinate debt.
The $95 million of new-money proceeds will help finance capital projects throughout the U.S. Virgin Islands. Those plans include school construction, water and sewer upgrades, building and road renovations, open space initiatives, and land acquisition for affordable housing programs, among other projects, according to the preliminary official statement. The $6 million taxable piece will help finance upgrades to the USVI’s 911 emergency response system.
The $381 million of refinancing bonds will current refund Series 1998A and Series 1998E for savings. Julito Francis, the VIPFA’s director of finance and administration, said the authority anticipates the current refunding to generate $21 million of net present-value savings during the next two years.
The Series 2009 bonds are secured by rum tax revenues, or cover-over revenues, that USVI receives each year from the federal government. The U.S. applies a tax of $13.50 per proof gallon on U.S. rum distributors. Of that tax, the territory — which produces Cruzan rum — and Puerto Rico — home to Bacardi and other rum makers — receive $13.25 per proof gallon.
The $13.50 charge will expire at the end of this year. If Congress fails to extend the $13.50 rate, the charge will drop to $10.50 per proof gallon. Historically, Congress has approved the $13.50 rate, but sometimes after an expiration date, creating a temporary period where the territories receive the lower $10.50 per proof gallon rate.
“They typically attach the extension bills to other legislation that is going through Congress and it’s often delayed, but we currently get the $13.25,” Francis said.
The VIPFA has $477.8 million of outstanding senior and subordinate rum-tax bonds. The authority also has $250 million of outstanding subordinate Diageo rum bonds, which will help to finance a new distillery for Captain Morgan rum. Spirit maker Diageo PLC owns Captain Morgan and will move production of the rum from Puerto Rico to the USVI. The territory anticipates receiving rum tax receipts from Captain Morgan rum beginning in fiscal 2012.
Of the authority’s rum bonds, the subordinate Diageo bonds are the last bonds to receive rum tax revenues. The Cruzan and future Captain Morgan rum revenues first pay down senior bonds followed by subordinate bonds.
If Congress upholds the $13.25 allocation to the territories, the authority anticipates receiving $102.4 million of rum tax receipts from Cruzan rum in fiscal 2011, according to projections calculated by IHS Global Insight Inc. That allocation will double to $223.8 million in fiscal 2012 with the addition of Captain Morgan. The combined revenues are projected to increase steadily each year to $377.6 million in fiscal 2024.
In comparison, a $10.50 allocation would generate $81.2 million in fiscal 2011 for the territory, with that amount increasing to $177.3 million in fiscal 2012. Rum tax revenues are projected to increase annually and reach $299.2 million in 2025.
In looking at debt service coverage, a $13.25 tax rate would generate a total combined debt service coverage ratio that ranges from 2.78 times in fiscal 2012 to 3.64 times in 2015 on the senior and subordinated rum-tax bonds as well as the subordinate Diageo rum-tax bonds, according to the POS.
Under a $10.50 scenario, debt service coverage on the senior, subordinate, and Diageo bonds combined would range from 2.2 times in fiscal 2012 to 2.88 times in fiscal 2015.
The USVI is in talks with Cruzan to form an agreement in which the rum maker would agree to produce all of its rum in the territory for 30 years. In return, the territory would finance a new washwater treatment facility and expand Cruzan’s current location.
The POS indicates that the territory would provide grant financing for the improvements via the authority’s issuance of rum bonds. Such an agreement, which mirrors the territory’s agreement with Diageo, requires legislative approval.
The POS indicates that payment of the Series 2009A, 2009B, and 2009C bonds may rely on the territory reaching a 30-year agreement with Cruzan.
“There can be no assurance that if the legislature does not ratify such an agreement or authorize the issuance of bonds for the capital required for the Cruzan Washwater Treatment Facility and the improvement and expansion of the Cruzan facility, that Cruzan will continue to produce rum in the Virgin Islands in amounts sufficient to generate [rum tax revenues] in amounts necessary to pay the principal and interest due and payable on the Series 2009 bonds,” the POS.