Public Finance Authority board members gave the go-ahead Tuesday for the sale of up to $105 million in bonds needed to finance a wastewater treatment plant and expanded Cruzan Rum facility on St. Croix.
A new 30-year agreement with Cruzan was signed into law by the governor early this month, after clearing the full Senate during a special session in late October. The proposed agreement allows Cruzan to expand its focus from bulk rum to branded rum and increase its production by nearly 50 percent.
The new bond issue will be done in two phases, with about $40 million first being floated for the wastewater treatment plant. The deal is expected to close by mid-December, Citigroup’s Guy Logan, the lead underwriter on bonds, said during Tuesday’s PFA board meeting on St. Thomas.
The bonds were recently given a Baa3 investment-grade rating from Moody’s and a similar rating from Fitch Ratings is expected to follow, which Logan said would boost their reception on the bond market. A bond rating of Baa3 indicates medium-grade quality. According to the investment site, StreetAuthority.com, a Baa3 rating indicates that "security currently appears sufficient, but may be unreliable over the long term."
The government anticipates a significant increase in projected cover-over revenues once the project gets up and running, which will go toward repaying the new bonds, along with an older 1998 bond issue.
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.
The new revenues will also provide a permanent funding source for the Molasses Subsidy, which the government uses to help pay for the cost of bringing in the molasses needed for local rum production. If the subsidy — which has been financed over the years through a contribution from the General Fund — wasn’t available, the territory would lose out to places such as Brazil and Guatemala, where sugar cane is still being produced and the overall cost of making rum is cheaper, PFA financial advisor David Paul said Tuesday.
And with more money coming into the Molasses Subsidy from the deals inked with Cruzan and Diageo PLC—whose St. Croix-based Captain Morgan rum facility is in the works—there is more of an incentive for the local rum companies to step up production, PFA Director of Finance and Administration Julito Francis said after Tuesday’s meeting.
"There is a cap, meaning the companies can only get up to a certain amount in overall benefits, but I mean, the incentive now is to produce as much rum as possible," he added.
The only other concern brought up during the meeting centered on the ongoing rum war between the territory and Puerto Rico, whose officials have been urging Congress to support a proposal changing the way the rum cover-over revenues can be used.
PFA board chairman Gov. John deJongh Jr. said Tuesday that the government is "feeling fairly comfortable" that the proposal will not go anywhere, since it would also hurt Puerto Rico and undermine the efforts made by Congress to help the territories expand the rum industry and promote economic development.
While the proposal has yet to make any progress in Congress, the government will continue to "carefully monitor" what happens, PFA bond counsel Patricia Goins added later.
Present during Tuesday’s meeting were board members Angel Dawson Jr., deJongh, Debra Gottlieb, Keith O’Neale Jr. and Pablo O’Neill.
