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PFA Unfazed by Lower Cruzan Bond Rating

While the V.I. government got a lower than expected credit rating Monday on bonds needed to support its new 30-year agreement with Cruzan VIRIL, Public Finance Authority head Julito Francis said Tuesday the BBB- rating from Fitch Ratings should not affect the expected sale of the bonds next week.

PFA board members authorized the up to $105 million bond issue during the November board meeting, just weeks after the agreement — which includes the construction of a new wastewater treatment plant and expanded Cruzan Rum facility on St. Croix — was passed by the Senate and signed into law by Gov. John deJongh Jr. The new bond issue will be done in two phases, with about $40 million in bonds being floated on the first go-around for the wastewater treatment plant.

At the November meeting, the PFA’s financial advisors and bond counsel said the bonds should get a "tremendous" reception at the market, and announced that Moody’s had given them a Baa3 (medium investment grade quality) credit rating. A similar rating from Fitch — an international credit rating agency — was expected to follow, they said.

But in a release Monday, Fitch announced that it had given the nearly $40 million in bonds a BBB- rating based on certain "project and political risks," which take into account the long-term stability of rum production in the Virgin Islands and the continued demand for rum products.

At the November meeting, PFA board members delved into those very issues, with concerns raised about cheaper production and labor costs in neighboring Caribbean regions and the territory’s ongoing rum battle with Puerto Rico, whose resident commissioner recently introduced a proposal in the U.S. House of Representatives that would change the way rum cover over revenues are used.

The federal government currently collects $13.50 in excise taxes — commonly referred to as cover-over revenues — on each proof gallon of V.I.-produced rum sold throughout the mainland. Of that amount, $13.25 is remitted to the V.I. government. Despite the concerns, government officials have said they are anticipating a significant increase in projected cover-over revenues once the project gets up and running, money which will go toward repaying the new bonds, along with an older 1998 bond issue.

Despite the BBB- rating — which mirrors the debt rating Fitch recently assigned to Cruzan owner Fortune Brands based on lower than expected revenues for 2008 and even lower 2009 estimates — Fitch has given the V.I. bonds a stable outlook based on the strength of the rum cover over program, which the company said is "well-established."

"Under various alternative scenarios analyzed by Fitch, projected matching fund revenues remain sound and provide for sufficient debt service coverage," according to the release, which said overall rum consumption will continue to decline during the current economic downturn before picking up again after 2010.

Fitch also sees the passage of Puerto Rico’s rum proposal as "remote," the release said.

On Tuesday, Francis said the BBB- rating is "consistent" with those assigned to the government’s other bond issues.

"I mean, it’s hoped that it will be the same across the board," he said when asked about the Baa3 rating from Moody’s. "To have different ratings is not really good, but in this case, it is consistent with most of our current issues. We would like it to be higher, but we’re happy overall."

Francis said the government also anticipates an "oversubscription," meaning more orders for the bonds on the market than there are bonds.

"It’s when you have, for example, a half a billion worth of bonds to sell, but $2 billion worth of orders," he explained. "If that happens by any significant amount, we will have competition which could lower the interest rate, and we expect that to happen in this case."

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