ST. CROIX — A major credit rating agency has revised the outlook to “negative” from “stable” and affirmed the long-term rating of BBB for the Matching Fund Special Purpose Securitization Corporation Matching Fund Securitization Bonds, according to the agency.
The bonds are backed by matching fund receipts, or federal excise tax revenues collected on rum produced in the territory that is sold on the U.S. mainland. The U.S. government returns the excise tax revenues to the Virgin Islands in what is known as rum cover-over.
Kroll Bond Rating Agency’s revision of the rating outlook to negative reflects a trend of declining pledged matching fund receipts in each of the last three years, according to KBRA’s surveillance report on the bonds.
Declining receipts reflect a 20% reduction of the portion of the rum excise tax receipts that constitute matching fund receipts to a level of $10.50 per proof gallon level beginning on January 1, 2022 from $13.25 in prior years due to congressional inaction to maintain the extended rate, as it had previously done since 1999. Declining receipts further reflect a 14.9% reduction in estimated federally-taxed rum proof gallons between fiscal years 2023 and 2025.
Another credit challenge attributing to the revised outlook to negative is the lack of diversification for the pledged revenues as they consist of rum sales from only two St. Croix-based rum companies — Diageo and Cruzan — to U.S. consumers. Fluctuations in consumer preferences and competitive dynamics have also seen estimated federal excise taxes on proof gallons decline.
Additionally, unlike the pledged matching fund receipts, the ongoing payments to the rum companies funded from the government’s residual certificate receipts are not bankruptcy remote, introducing the risk that payments could be interrupted or delayed.
Reinstatement by Congress of the extended $13.25 per proof gallon cover-over rate accompanied by sustained stabilization or growth in rum sales resulting in improved maximum annual debt services coverage could lead to a rating upgrade, according to KBRA. Previously, Congress had regularly increased the rate by $2.75 to the date of the most recent expiration. It has now been more than three years since the last extension lapsed. Bills have been introduced periodically to retroactively restore the cover-over rate to $13.25 but it remains uncertain whether such legislation will ever be enacted.
The bonds are secured by a statutory lien on the pledged matching fund receipts that have been sold through a true sale by the VI government to the Matching Fund Special Purpose Securitization Corporation, a bankruptcy remove special purpose entity. The MFSPSC was created by legislation in Act No. 8540, effective February 8, 2022, which added Chapter 24 to Title 29 of the Virgin Islands Code and the assignment, purchase, and sale agreement.
Kroll Bond Rating Agency’s rating also reflects positive credit considerations, including the expectation that U.S. Treasury will deposit the full amount of budgeted matching fund receipts in a restricted account with the trustee prior to the start of each fiscal year. The combination of Act No. 8540, the bankruptcy remoteness of the corporation, the sale agreement, and the indenture provide the bonds with a strong legal framework that KBRA believes will substantially insulate the pledged matching fund receipts and the corporation from the credit risk of the Virgin Islands.
The MFSPSC was approved by the Legislature of the Virgin Islands to issue bonds on rum tax revenues that permitted refinancing on more favorable terms at 2022 interest rates. The special purpose entity was established by the Virgin Islands Public Finance Authority to securitize the matching fund revenues, allowing the territory to issue bonds backed by the expected future revenue stream instead of waiting for the annual rum tax transfers. The purpose of the bond restructuring was to reduce a portion of the government’s debt and provide upfront capital to bring solvency to the Government Employees’ Retirement System. The pension system receives between $82 million to $158 million in annual contributions, totaling about $4 billion over 30 years.
