NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns a 'AA' rating to the following lottery revenue bonds of the State of Florida:
--$241.685 million State Board of Education lottery revenue refunding bonds, series 2016A.
The bonds are expected to sell competitively as soon as April 25, 2016 for bids on 18 hours' notice.
Fitch also upgrades to 'AA' from 'A+' the rating on $1.985 billion in outstanding lottery revenue bonds.
The Rating Outlook is Stable.
The bonds have a first lien on lottery revenues deposited to the Education Enhancement Trust Fund (EETF).
KEY RATING DRIVERS
RESILIENT REVENUE STREAM: The upgrade reflects application of Fitch's revised criteria for U.S. state and local government credits, which was released on April 18. Under the revised criteria, Fitch uses scenario analysis to explore the sensitivity of the dedicated revenue stream to downturns and considers coverage levels in light of these results. Fitch expects Florida's lottery revenues to continue to grow at a solid pace and be actively managed so as to produce continued sound coverage of debt service requirements. This coverage provides ample cushion to absorb a downturn in expected revenues in a modest recession scenario.
SOLID DEBT SERVICE COVERAGE: Debt service coverage from the first lien on lottery revenues deposited into the EETF is ample on both an annual and maximum annual debt service (MADS) basis. Revenues have recovered following a significant decline during the recession.
RISKS ASSOCIATED WITH PLEDGED REVENUE: Lottery expenditures are discretionary and sensitive to personal income, employment, and population growth. The Florida lottery faces current and future competition, although the state has covenanted that other similar state gaming revenues will be first applied to debt service on lottery revenue bonds.
STRONG LEGAL PROVISIONS: Lottery proceeds are constitutionally dedicated to educational purposes and a non-impairment clause guards against changes in the percentage allocation to the EETF that would negatively affect pledged revenues. An additional bonds test (ABT) requires 3x coverage of MADS, limiting leverage of the pledged revenue stream.
RELATIONSHIP TO STATE RATING: The rating is capped by Fitch's evaluation of the state's general credit, which is not currently a limiting factor for the rating given the state's GO rating of 'AAA'. Various covenants and statutory provisions protect bondholders; however, the flow of pledged revenue is not fully structurally protected or independent of state operations.
DEBT SERVICE COVERAGE: The rating is sensitive to the performance of pledged revenues and maintenance of ample debt service coverage.
Florida's voter-approved lottery began in 1988 and proceeds are constitutionally dedicated to educational purposes. Lottery sales are split between instant and online games with instant games gradually becoming more dominant since the lottery's inception. Total lottery sales grew every year from fiscal years 1999 to 2008 but fell during the recession, 5.7% in fiscal 2009 and a further 1% in fiscal 2010. Sales have since recovered, exceeding their pre-recession peak in fiscal 2012 with strong growth in recent years. Prior to 2009, lottery revenues had only declined in three years since inception, none consecutively. Although revenues did decline during the recession, the reductions were less than that of other statewide economically sensitive revenue sources, including the state sales tax and documentary stamp tax.
SOLID DEBT SERVICE COVERAGE
Debt service coverage from the first lien on lottery revenues deposited into the EETF is ample on both an annual and MADS basis. Revenues have recovered following a decline during the recession. Fiscal 2015 pledged revenues provided 4.8x coverage of annual debt service and 4.6x coverage of MADS. Florida's lottery is mature, although structural adjustments have bolstered ticket sales over time.
STRONG LEGAL PROVISIONS
Lottery proceeds are constitutionally dedicated to educational purposes and a non-impairment clause guards against changes in the percentage allocation to the EETF that would negatively affect pledged revenues. An ABT requires 3x coverage of MADS, limiting leverage of the pledged revenue stream.
Beginning in fiscal 2003, the percentage of instant game ticket revenues distributed as prizes was changed from a fixed to a variable percentage as a means to stimulate sales. This change was accompanied by a non-impairment covenant to maintain the revenues transferred to the EETF even as the prize percentage varies. In addition, any reduction in the allocation rate must produce revenues that provide at least 2x coverage of MADS. The pay-out percentage for online game revenues was similarly changed from fixed to variable in fiscal 2006.
While the enabling legislation allows 30-year bonds, issuance of 20-year bonds with level debt service has been legislatively directed. The state has covenanted that any other similar state gaming revenues would be first applied to debt service on lottery revenue bonds. Specifically, the state legislated in 2006 that any revenue derived from the tax on slot machine revenues, although not directly pledged, shall first be available to pay lottery revenue bond debt service in the event that lottery revenues prove insufficient.
RESILIENCE OF PLEDGED REVENUE
Lottery expenditures are discretionary and sensitive to personal income, employment, and population growth. The Florida lottery faces current and future competition, although the state has covenanted that any other similar state gaming revenues will be first applied to debt service on lottery revenue bonds.
Assuming full leveraging up to the ABT, projected pledged revenue stressed in a 1% national GDP decline scenario indicates a 4% decline in revenues. Pledged revenues would continue to provide ample coverage of projected MADS in this scenario. Ample cushion remains when considering the largest single year of historical revenue decline (-7.8% in 1996) and assuming full leveraging up to the ABT.
Additional information is available at 'www.fitchratings.com'.
U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)
Dodd-Frank Rating Information Disclosure Form