Fitch Ratings assigns 'F1+' ratings to the following bond anticipation notes (BANs) backed by the state of Ohio's liquor enterprise:
--$34.03 million chapter 166 development assistance BANs, series 2012A (logistics and distribution program);
--$40 million chapter 166 taxable development assistance BANs, series 2012B (Ohio 166 direct loan program);
--$5 million chapter 166 taxable development assistance BANs, series 2012C (innovation Ohio loan program);
--$115 million chapter 151 revitalization project BANs, series 2012A.
The BANs are scheduled to sell via negotiation on May 23, 2012. The BANs are expected to mature on May 30, 2013 although they are subject to call at any time.
Fitch also affirms the 'AA-' rating and Stable Outlook on approximately $641.5 million in outstanding bonds issued under chapters 166 and 151 of Ohio statutes.
The BANs are secured by a pledge of profits of the state from its sale of spirituous liquor, the Chapter 166 BANs on a first priority basis, and the Chapter 151 BANs on a subordinated basis. No rating distinction is made between the senior lien Chapter 166 bonds and the subordinate lien Chapter 151 bonds due to strong debt service coverage of both liens.
KEY RATING DRIVERS
LONG-TERM BONDS WILL REDEEM BANS: The 'F1+' ratings on the notes reflect the security and expected source of repayment at maturity, which is long-term bonds supported by net profits of the state's liquor enterprise.
NARROW SOURCE OF PLEDGED REVENUES: The 'AA-' ratings on the senior lien Chapter 166 bonds and subordinate lien Chapter 151 bonds reflect the narrow and discretionary source of securing revenues offset by the long history of operations, as well as the growth and high level of profits from the state's liquor enterprise.
SOLID GROWTH IN PLEDGED REVENUE: Liquor profits have demonstrated solid growth in recent years with price increases, premium beverage sales, and a reduction in wholesale discounts. However, risk of volatility remains from changes in consumer tastes, purchasing habits, prices, or state or federal taxation.
STRONG DEBT SERVICE COVERAGE: Debt service coverage on currently authorized bonds is strong on both an annual and maximum annual debt service (MADS) basis. Limits on additional bonding and allowable debt service help to keep coverage high.
PLANNED TRANSFER OF SYSTEM: The state plans to lease the liquor enterprise system to a not-for-profit entity, which would result in a changed use of state liquor enterprise revenue. The lease would be contingent upon the required redemption and defeasance of all outstanding Chapters 166 and 151 debt obligations, including these notes. If the transfer were not to take place prior to note maturity, Fitch expects that the notes would be taken out with Chapter 166 and 151 long-term bonds.
ONGOING LITIGATION IMPEDES TRANSFER: The state's plan to lease the liquor enterprise system to the new not-for-profit JobsOhio program has been delayed by ongoing litigation. The transfer was expected to occur in fiscal year (FY) 2012 and the state now anticipates completing the transaction in FY 2013.
The state issues debt obligations backed by its liquor enterprise for a variety of purposes under two provisions of Ohio Law, Chapters 166 and 151. Chapter 166 bonds or BANS can be issued for five economic development programs, including Direct Loan, Innovation Ohio and Innovation Project Guarantees, Research and Development Loans, Logistics and Distribution, and Advanced Energy. Chapter 151 subordinate bonds or BANs are issued for brownfield revitalization projects.
All Chapter 166 and 151 debt obligations are secured by a pledge of the state's liquor profits, net of all operating costs of the division of liquor control, and revenues from the $3.38 gallonage fee that is deposited directly to the state's general revenue fund. MADS on senior Chapter 166 and subordinate Chapter 151 debt is capped by statute at $103 million; actual FY 2011 pledged revenues provide 2.30x coverage of this statutory maximum. Coverage of projected aggregate MADS, including debt service on bonds to redeem the current offerings, by fiscal 2011 revenues is higher at 2.81x.
Based on year-to-date receipts through April 2012, FY 2012 revenues are projected to provide 2.44x coverage of maximum allowable, and 2.97x coverage of actual projected, aggregate annual debt service. All excess net liquor profits beyond debt requirements, working capital (for inventory purchase), and operating costs of the Liquor Control Commission are transferred to the state's general revenue fund.
The statutory maximum amount of Chapter 166 debt permitted was increased from $500 million to $630 million in June 2008 with the passage of a $1.6 billion, debt-funded job stimulus program. Maximum allowable annual debt service was increased at that time to $63 million. The Chapter 151 program was also increased to a maximum of $400 million, from $200 million, with additional bond issuance under both programs expected each year. Additional issuance under Chapter 166 requires 2.5x coverage of MADS, and the state covenants in the trust agreement to set liquor prices to provide 110% of maximum projected debt service on all obligations (both Chapters 166 and 151) secured by liquor profits. Additional issuance under Chapter 151 requires 2x coverage of MADS.
The state's biennial budget for FYs 2012 and 2013 included the transfer of the state's liquor enterprise system from the state department of commerce to JobsOhio, a private not-for-profit economic development entity created in February 2011 that is overseen by the state. JobsOhio is structured to have the authority to issue debt to finance economic development projects, secured by net profits of the liquor enterprise system. The lease of the system to JobsOhio has been delayed since 2011 due to ongoing litigation that challenged its creation, requiring the redemption of BANs that were issued in 2011 as part of the current issue. The state plans to complete the transfer sometime in FY 2013.
The lease as currently contemplated requires JobsOhio to issue long-term bonds to redeem and defease all outstanding Chapter 166 and 151 debt issues, including these notes, as provided in the trust indenture. These notes, issued to fund interim capital needs of the state's economic development program, are callable at any time after July 16, 2012 to enable their defeasance should the agency restructuring take place. Should the agency restructuring not take place, these notes will be taken out with Chapter 166 and 151 long-term bonds.
Ohio's state liquor monopoly operates through 458 agent stores receiving commissions, and controls all sales of liquor with more than 21% alcohol by volume (thus excluding beer and wine). Gallons sold, gross profit, and net profit growth has been solid in recent years. Changes in consumption and increased federal and state taxation had caused a slump through the mid-1990s. Since then, sales, profits, and consumption have all increased steadily, as distillers have increased prices and marketed premium products effectively. A statutory reduction in the discount offered to wholesale buyers beginning in July 2005, to 6% from 12.5%, further boosted net profits.
Average annual growth in gallons sold was 2% between 2005 and 2011; gross sales rose 3.5% to $786 million over the same time period. Gallons sold increased 1.6% in FY 2011, slightly more than expected, and net profits have recorded average annual growth since 2005 of 5.3%. Net profit growth of 5.9% is expected in FY 2012 based on receipts through April 2012. Modest growth in sales and revenues are expected over the next two years with net profit expected to remain steady. Although many states operate liquor enterprises, few issue debt against the liquor enterprise generated revenue stream. In its analysis of the liquor enterprise revenue obligation, Fitch focuses on: the nature of the legal pledge and covenants, including the additional bonds test; the history of the revenue stream; historical and projected debt service coverage levels and amortization; and operating characteristics of the enterprise.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 15, 2011);
--'U.S. State Government Tax-Supported Rating Criteria' (Aug. 15, 2011).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. State Government Tax-Supported Rating Criteria
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