NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'A+' rating to the West Virginia Water Development Authority's (WDA) issuance of $76.27 million infrastructure excess lottery revenue bonds 2014 Series A (Chesapeake Bay/Greenbrier River Projects).
The bonds are scheduled to be sold via negotiation on or about Sept. 23, 2014.
In addition, Fitch affirms the 'A+' rating on outstanding bonds secured by West Virginia's lottery and excess lottery fund revenues, as detailed at the end of this release.
The Rating Outlook is Stable.
SECURITY
Lottery and excess lottery revenue bonds are secured by separate statutory allocations of net profits of the lottery fund and state excess lottery revenue funds, special revenue funds of the state of West Virginia. The bonds hold successive lien positions against the pledged revenues.
The WDA excess lottery bonds currently offered are secured by a separate statutory allocation of $6 million from the state excess lottery revenue fund.
KEY RATING DRIVERS
AMPLE BUT DECLINING DEBT SERVICE COVERAGE: Debt service coverage is currently ample but is declining due to additional leveraging and revenues constrained by increasing competition and a weakened economy. Competing gaming venues are expected to continue to come online in the region, pressuring the lottery's revenue flow There are no rating distinctions between various liens due to strong coverage levels; 4.8x coverage for all excess lottery bond debt service and 5x coverage of all lottery bond debt service was achieved in fiscal 2014.
RECENT LEGISLATIVE CHANGES WILL SUPPORT DEBT SERVICE COVERAGE: Legislative changes made in the 2014 session provide for increased revenue pledged for payment of excess lottery revenue bonds and are expected to result in more modest declines in future coverage on these bonds rather than a sharper declining scenario due to ongoing regional competition. The changes also provide for excess lottery funds, after payment of excess lottery debt service, to be available for payment of lottery debt service.
DISCRETIONARY REVENUE STREAM: Lottery and excess lottery revenues are derived from discretionary spending; exposed to current and future competition; and sensitive to population, personal income, and employment factors.
HIGH-PRIORITY CAPITAL PROJECTS: Projects funded by lottery bonds are high priorities of the state including improvements to water and wastewater infrastructure, higher education, schools, parks, and capitol facilities.
RATING SENSITIVITIES
The ratings are sensitive to the performance of pledged lottery and excess lottery revenues, additional leveraging for capital projects, and continued solid coverage levels.
CREDIT PROFILE
The 'A+' rating considers the discretionary nature of lottery revenues, which are sensitive to population, personal income, and employment factors, as well as to existing and future competition. Offsetting these inherent uncertainties is the ample coverage of debt service by lottery and excess lottery revenues, the success of the lottery commission to-date in adapting to an increasingly competitive environment, and the importance of the financed projects. Reflecting West Virginia's support for this security, the state recently enacted legislation that expands the revenue pledged to the repayment of the excess lottery revenue bonds and also provides for excess lottery revenues, after payment of corresponding debt service, to be available for the payment of lottery bonds on a subordinate basis. Lottery revenue, after the payment of lottery bond debt service, has historically been available on a subordinate basis for the payment of the excess lottery bonds and will continue to be.
Proceeds from the current bond issue will fund grants to local governments for approved Chesapeake Bay watershed compliance projects and Greenbrier River watershed compliance projects with an authorized permitted flow of 400,000 gallons per day or more. To the extent moneys from the $6 million annual allocation are not required to pay debt service, the WDA may use such moneys to provide grants to local governments for the design or construction of improvements for watershed compliance projects. There is a 2x MADS additional bonds test (ABT) to issue additional debt secured by the $6 million allocation; however, the WDA intends to fully leverage the $6 million allocation with the current bond issue.
The lottery operates a mix of six games:
--Instant or scratch-off games (8.7% of fiscal 2014 lottery sales);
--Online numbers games (6.8% of fiscal 2014 lottery sales);
--Racetrack video lottery (48.7% of fiscal 2014 lottery sales, down from 58.1% in fiscal 2009);
--Limited video lottery (31.1% of fiscal 2014 lottery sales);
--Racetrack table games (4.2% of fiscal 2014 lottery sales); and
--Casino gaming at the Greenbrier Resort (a modest 0.6% of fiscal 2014 lottery sales).
With the addition and expansion of games, total lottery sales rose from approximately $244 million in fiscal 1997 to a peak of $1.56 billion in fiscal 2007; gross sales have mostly declined since due to the recent recession and the expansion of gaming in neighboring states. A 4.7% increase in sales in fiscal 2012 was primarily related to the collection of permit fees for limited video lottery licenses while an 8.9% decline in sales in fiscal 2013 and a further 8.6% decline in fiscal 2014 reflected the ongoing competition for gaming revenue in the region.
Prior to the enactment of House Bills (HB) 101 and 106 that passed in the 2014 legislative session, the state excess lottery revenue fund received revenues from two sources: the limited video lottery and racetrack video lottery games, operated by the West Virginia Lottery Commission, after revenues reach a certain benchmark. $266.8 million was credited to the state excess lottery revenue fund in fiscal 2014, after an allocation to a senior citizen homestead credit of approximately $10 million; this is down from a peak of $407.7 million in fiscal 2008 and from $295.6 million received in fiscal 2013. The lottery fund receives the state's share of net profits from instant and online games (traditional games) and from a portion of net terminal income derived from racetrack video lottery. $163.6 million was credited to the state lottery fund in fiscal 2014, down from a peak of $185.3 million in fiscal 2007 and from $177.4 million received in fiscal 2013.
In Fitch's opinion, HB 101 and 106 implemented several positive changes to the lottery and excess lottery securities. Effective July 1, 2014 (fiscal 2015), HB 101 bolsters net revenue available for debt service payments from the state excess lottery revenue fund by reducing the amount of statutory transfers that are made from gross lottery and excess lottery revenue collections. Net revenue in the state excess lottery revenue fund is also increased through the allocation of additional net revenue from racetrack table games and casino gaming at the Greenbrier Resort and the reduction of certain racing-related statutory transfers and other fund allocations by 10%. HB 101 also specified that lottery and excess lottery debt service would be paid prior to any other appropriation from lottery or excess lottery funds. The increase in net revenues from enactment of this bill is wholly directed to the state excess lottery revenue fund.
HB 106, effective as of March 14, 2014, created a backup pledge for the lottery fund from the excess lottery fund (after the payment of excess lottery fund debt service) and reconfirmed the existing backup pledge for the excess lottery fund from lottery fund revenues.
The implementation of HB 101 is expected to stabilize debt service coverage for excess lottery fund revenue bonds beginning in fiscal 2015, following a decline in coverage of statutorily permitted debt service in fiscal 2014 to 4.8x from 5.4x in fiscal 2013. The state forecasts coverage on the excess lottery bonds in fiscal 2015 to improve to 5x as the additional pledged revenue is incorporated. Coverage of statutorily permitted debt service on the lottery bonds similarly declined in fiscal 2014, to 5x from 5.4x in fiscal 2013. The state projects lottery bond debt service coverage to decline to a still comfortable 4.3x in fiscal 2015, due to an expected decline in racetrack video sales. Fitch believes additional gaming venues will continue to come online in the region, pressuring the revenue flow from the state's facilities and likely lowering coverage ratios to an as-yet to be determined gaming saturation point.
RATING CONSIDERATIONS
Although most states operate lotteries within their borders, relatively few issue debt against the lottery-generated revenue stream. In its analysis of state lottery-backed revenue obligations, 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, including the nature of the games offered and the competitive environment for discretionary gaming spending.
For an 'A+' rating, Fitch expects a clear and strong legal pledge and covenants; an ABT of at least 3x MADS to offset the discretionary nature of the revenue stream; and historically sustained, solid lottery revenues. In the case of West Virginia, the statutory maximum on debt service and the ample coverage of that statutory maximum by pledged revenues mitigates concern over the less than 3x ABT for the current, as well as several of the outstanding program, issuance.
RATING AFFIRMATIONS
As part of this rating action, Fitch affirms the 'A+' rating on the following bonds secured by West Virginia's lottery and excess lottery fund revenues:
Lottery Revenue Bonds
--$147.9 million Economic Development Authority (EDA) lottery revenue bonds series 2010A;
--$71.185 million Higher Education Policy Commission community and technical colleges (CTC) capital improvement revenue bonds series 2009A.
Excess Lottery Revenue Bonds
--$154.17 million Economic Development Authority bonds series 2004;
--$214.127 million School Building Authority (SBA) bonds, series 2008, series 2009 A&B and series 2010 A&B.
The EDA and SBA excess lottery bonds are secured by separate statutory allocations of $19 million each from the state excess lottery revenue fund. The WDA debt service transfer is on parity with the SBA transfer; both transfers are subsequent to the EDA excess lottery fund transfer. Bondholders have no lien or other security interest in the projects.
The EDA lottery revenue bonds have a second lien on revenues of the lottery fund and are paid from a $10 million allocation, subordinate to an allocation of $18 million for SBA lottery debt service. The CTC bonds have a third lien position and are paid from a $5 million allocation. Bondholders have no lien or other security interest in the projects.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. State Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. State Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686033
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=871535
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