PFA Votes For $250M in Bonds to Finance Diageo Project

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Oct. 31, 2008 — Moving ahead with plans to bring the production of Captain Morgan rum to St. Croix, Public Finance Authority board members passed a resolution Friday allowing the agency to go to the market to float up to $250 million in bonds to help finance the project.
Senators ratified the 30-year agreement with beer, wine and spirits giant Diageo PLC during a session in early July, granting the PFA the authorization it needed to issue the special-project bonds. The board originally voted to move forward with the indenture during a meeting in September. Since no official public notice about the meeting was given, board members had to take the issue up again on Friday, along with all the other matters listed on the September agenda.
Transcripts of the September meeting were made available to the press on Friday.
The agreement with Diageo will bring approximately $2.9 billion in new excise-tax revenues into the government's coffers throughout the life of the agreement, government officials have said. Rum production is expected to start in 2012, with the distillery producing an average of 20 million-proof gallons each year.
Two sites have been identified on St. Croix for the new distillery and related warehouse, Rob Irby, Diageo's project manager, said Friday.
"We've identified two properties — the first is leased land within the St. Croix Renaissance Group's property on St. Croix for our distillery and molasses areas, and the second is a purchase area for the warehouse facility," he said via teleconference. "The agreements on both sides are substantially complete…we're locked in on all the business terms in both cases." The exact site for the warehouse facility was not revealed Friday because negotiations are still ongoing, Julito Francis, PFA director of finance and administration, said after the meeting.
Maguire Group, an architectural and engineering firm with offices in the territory, has been contracted to help with the Coastal Zone Management permitting process, Irby added during the meeting. "We anticipate being in a position to file a major CZM permit during the first week in December," he said, adding that Diageo also plans on having "shovels in the ground by spring."
The financing timeline provided by Diageo shows a projected need for $20 million by the end of the year, according to David Paul, fiscal advisor to the PFA. The number will increase to $50 million by the first quarter of next year, he said.
"A lot of this is required for components of construction that's being ordered," Paul explained.
Despite the recent "turmoil" in the municipal bond market, conditions have begun to open up over the past two weeks, allowing for the financing process to move forward, according to Jim Kelly, bond underwriter for JP Morgan.
"We've also identified a number of alternatives to ensure that the project can continue to move along the path," he said. "But we're confident that we're going to sell $100 million to $125 million worth of bonds to provide a good base for project. These bonds will be secured by the cover-over revenues from the rum that will be manufactured from this facility. It's complex financing, certainly not made easier with the current market conditions, but one that is moving forward expeditiously."
Additionally, annual debt service payments on the Diageo bonds would be made only after payment obligations on the government's outstanding 1998 series matching fund bonds are taken care of, officials said Friday.
Another resolution passed by the board Friday authorizes the PFA to go to the market to float up to $392 in new gross receipts tax bonds — pending authorization from the Senate — to finance a variety of capital improvement projects.
"The purpose of the resolution is to provide a wide range of capital project financing," Paul explained during the meeting. "There is slightly over $300 million in projects identified that will be financed as the projects are ready to go. The bonds will be issued over a period of years, and it is expected that the PFA will issue approximately $125 million worth of bonds over the next seven months to finance those projects that are ready to go."
The board also approved:
— the addition of Stacil and Co. — along with associates Venerable LLC — and Miller and Chevalier to their list of professional services contractors (Stancil and Co. will provide legal and advisory services as it relates to the prices of fuel being sold from Hovensa to the V.I. Water and Power Authority, while Miller and Chevalier will work with the U.S Treasury and Internal Revenue Service on issues relating to the local Economic Development Commission's tax incentive program);
— the reprogramming of $450,000 previously earmarked for the St. John parking lot project to the Department of Planning and Natural Resources for improvements to the Enid Baa and Elaine Ione Sprauve libraries;
— the reprogramming of $4 million from two St. Croix road projects to the Department of Public Work to pave roads in Williams Delight (during the meeting, Public Works Commissioner Darryl Smalls said the money is "desperately needed");
— the allocation of $2.6 million from the PFA project fund the purchase of a building, along with the associated architectural and engineering services and a portion of the initial build out, for VITEMA (the building, located on St. Thomas, is expected to be the headquarters for all emergency management operations and is a key component of the government's plan for a new 911 system, according to PFA board chairman Gov. John deJongh Jr.);
— a motion to retain St. Thomas-based Balboa Construction as the contractor for the St. Thomas Library and Records Center project;
— a fiscal year 2009 budget of $6.1 million;
— the use of $69,263.81 from an existing line of credit to take care of outstanding payments owed to Apple Construction for work done at the King's Alley Hotel on St. Croix;
— evicting Florida businessman Frank Pollara from King's Alley (Pollara had a lease for the hotel's restaurant, but had never completed the build out required for the space and owes the PFA about six months rent, Francis said after the meeting);
— putting King's Alley up for sale (the PFA got involved in the project as a means of stimulating St. Croix's lagging economy, but is not in the business of hotel management, Francis said later, when asked why the hotel was being sold); and
— a payment of $94,417 from 2004 matching fund bond proceeds to HTA Caribbean for services rendered to the Waste Management Authority while it was still under the auspices of Public Works.
Board members present during Friday's meeting were deJongh, along with Finance Commissioner Claudette Watson-Anderson and Office of Management and Budget director Debra Gottlieb. Board member Roy D. Jackson was absent.
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