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The following is a press release from Fitch Ratings: Fitch Ratings-New York-07 July 2010: Fitch Ratings assigns the following ratings to the Virgin Islands Public Finance Authority's (VIPFA) subordinated revenue bonds: --$42.2 million (Virgin Islands matching fund loan note-Cruzan project) series 2010A 'BBB'. The bonds are expected to sell via negotiation the week of July 19. In addition, Fitch affirms the following rating: --$39.2 million (Virgin Islands matching fund loan note-Cruzan project) series 2009A at 'BBB'. The Rating Outlook is Stable. RATING RATIONALE: --Matching funds are an established revenue stream based on federal law; payments made by the U.S. Treasury are transferred to escrow for payment of debt service on matching fund revenue bonds prior to being made available to the U.S. Virgin Islands (USVI) for other purposes. --A debt service reserve is funded at the lesser of maximum annual debt service (MADS), 10% of principal or 125% of average annual debt service. --Coverage has been solid over the last decade, benefiting from consumer trends in the U.S. market. Coverage is expected to be boosted by planned expansion of Cruzan production and completion of the Diageo facility over the next two years. --Payment on the bonds is ultimately dependent on ongoing Cruzan rum production in the territory, which itself is tied to continuation of federal matching fund program, the availability of incentives and production subsidies from the USVI. --Future revenues may be affected by changes in consumer tastes or purchasing habits. KEY RATING DRIVERS: --Uninterrupted rum production and continued U.S. support for the cover over program and the current USVI system of incentives; --Maintenance of sufficient coverage based on continuation of rum production; --On-schedule completion of the Diageo facility. SECURITY: Special, limited obligations of VIPFA payable from and secured by a pledge of and lien on the Cruzan trust estate, primarily matching fund revenues associated with the Cruzan facility after payment of obligations under the senior indenture. CREDIT SUMMARY: The rating on the Cruzan project bonds is based on the strength of the revenue stream supporting bond payments, consisting of matching fund payments made annually by the U.S. government transferred to escrow for payment of debt service prior to being made available to the government of the U.S. Virgin Islands (USVI). Offsetting factors include project and political risks, as well as longer-term risks associated with consumer demand for rum products and ongoing production in the USVI. The Stable Outlook is based on the expected continuation of matching fund payments by the U.S. government. Cruzan project matching fund bonds are special, limited obligations of the PFA, issued under an indenture (Cruzan indenture) established in 2009 and subordinate to bonds issued under a 1998 senior indenture (1998 indenture). Proceeds of this sale are funding additional facility improvements at the existing Cruzan VIRIL distillery. A total of $105 million in debt is authorized for expansion projects at the Cruzan distillery, part of a broader 30-year incentive agreement that closely mirrors the incentive agreement reached in 2008 between the USVI and Diageo plc (see Fitch's release of June 19, 2009). Including the current sale, a total of $81.4 million in Cruzan indenture bonds will be outstanding. A debt service reserve funded at MADS provides additional protection. Matching funds have been paid annually to the USVI by the U.S. government since 1954 based on sales in the U.S. of USVI rum. Funds are paid at a base rate of $10.50 per proof gallon in place since 1954 and with periodic increases in recent years to $13.25 per proof gallon. The $13.25 rate expired Dec. 31, 2009, pending renewal by the U.S. Congress of the higher rate. The higher rate has been repeatedly renewed in the past; should the increase not be extended, the rate would remain at $10.50. The annual payment is calculated from projected sales of USVI-produced rum in the U.S. in the following fiscal year, adjusted by an amount reflecting the difference between estimated and actual sales two fiscal years prior. The bonds include a covenant that if matching fund revenues are replaced with another federal funding stream, the USVI will use its best efforts to use the substitute revenues for bond repayment. The additional bonds test (ABT) for the Cruzan indenture requires that new issuance meet a three-year historical and two-year prospective MADS coverage test at 1.5 times (x) debt service for senior lien and 1.5x for second lien after payment of senior lien debt service, and two-year prospective MADS coverage at 1.2x combined senior and second liens. All Cruzan issuance to date, including the current bonds, has been on the senior lien. Currently no additional Cruzan bonds are scheduled, although approximately $28 million in authorization would remain. Project completion bonds up to $10.5 million are not subject to the ABT. Coverage of debt service has been adequate, with fiscal 2009 matching fund receipts covering debt service (to date all on 1998 indenture bonds) at 2.25x. Including the new Cruzan indenture bonds, coverage by 2009 actual revenues of aggregate MADS for Cruzan indenture bonds and all outstanding 1998 indenture bonds (inclusive of a scheduled sale this week of 1998 indenture bonds) would be 1.27x. (Fitch rates the 1998 indenture senior and subordinate lien bonds 'BBB+' and 'BBB', respectively.) Future coverage is expected to grow substantially with completion of the Diageo distillery by Diageo plc (rated 'A-' by Fitch, with a Stable Outlook) and expansion of the existing Cruzan-VIRIL distillery, owned by Fortune Brands (rated 'BBB-' by Fitch, with a Stable Outlook). To finance the two projects, in 2009 VIPFA established separate, subordinate indentures for each; $250 million has been issued under the Diageo-related indenture (Diageo indenture). All matching fund receipts, including those to be generated by the new Diageo distillery, benefit 1998 indenture bonds first. After satisfying requirements under the 1998 indenture, excess receipts from Cruzan and Diageo-generated matching funds are transferred to separate special escrow accounts based on each facility's production. Receipts from Cruzan VIRIL-related matching funds are not available to Diageo indenture bondholders after payment of 1998 indenture bonds, nor are future Diageo-related matching fund receipts available to Cruzan indenture bondholders. Excess revenue following payment of debt service on all indentures is used to meet various incentives under the USVI's agreements with the distillers. Under various alternative scenarios analyzed by Fitch, projected matching fund revenues provide for sufficient annual debt service coverage on outstanding and planned matching fund bonds, including assuming that the $13.25 rate is not renewed and the matching fund rate remains at $10.50. Including issuances under the Diageo and Cruzan indentures, annual coverage likewise remains adequate at either rate assuming timely completion of the Diageo facility. At the lower rate, coverage of MADS on all indentures combined (in 2022) would require revenue growth. Diageo distillery construction is reported to be advancing on schedule, with some associated revenues to be received later in 2010. Other political risks include drafted U.S. legislation questioning the USVI's use of matching funds for economic development incentives; passage of such legislation in Fitch's view is remote. The ABT for the 1998 indenture bonds excludes all matching fund receipts associated with the Diageo and Cruzan projects that are required to meet debt service, debt service reserve and certain other required payments under the Diageo and Cruzan indentures. Both Cruzan and Diageo must consent to 1998 indenture issuance. Issuance on the 1998 indenture senior lien bonds is at the ABT limit (including the sale of 1998 indenture senior and subordinated bonds scheduled this week). There will be approximately $927 million in 1998 indenture bonds following the sale (see Fitch's release of June 15, 2010). U.S. consumption of distilled spirits, including rum, has grown steadily in recent years based on shifting consumer tastes and the increasing attractiveness of premium products. Rum consumption in the U.S. is subject to broader shifts in consumer demand; average demand declined by approximately 1.5% annually during the 1985-1995 period but has increased by an average of 5.3% annually since. Despite the recession, rum consumption rose 1.6% in 2009 but is forecast to fall 1.9% in 2010 before resuming growth. Most USVI rum exported to the U.S. is bulk rum, representing approximately 13% of the U.S. market. Growth will be linked to completion of the Diageo facility and expanded shipment of branded rum from both facilities. Applicable criteria available on Fitch's web site at www.fitchratings.com: --'Tax-Supported Rating Criteria', dated Dec. 21, 2009; --'U.S. State Government Tax-Supported Rating Criteria', dated Dec. 28, 2009. Contact: Douglas Offerman +1-212-908-0889 or Alexandra Edwards +1-202-908-0181, New York. Media Relations: Cindy Stoller, New York, Tel: +1 212 908 0526, Email: [email protected]. Additional information is available at 'www.fitchratings.com'. (MORE TO FOLLOW) Dow Jones Newswires July 07, 2010 17:34 ET (21:34 GMT)