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MOODY'S ASSIGNS MIG1 RATINGS TO $34.03 MILLION OF OHIO DEVELOPMENT ASSISTANCE BOND ANTICIPATION NOTES (LOGISTICS AND DISTRIBUTION PROGRAM) AND TO $50 MILLION OHIO REVITALIZATION PROJECT BOND ANTICIPATION NOTES

18 May 2011

$438 MILLION OF OUTSTANDING PARITY DEBT AND $154 MILLION OF SUBORDINATE LIEN BONDS ARE AFFIRMED; OUTLOOK IS STABLE

Ohio (State of) Chapter 151 Bonds
State
OH

Moody's Rating

ISSUE

RATING

Revitalization Project Bond Anticipation Notes, Series 2011A

MIG 1

  Sale Amount

$50,000,000

  Expected Sale Date

06/02/11

  Rating Description

Special Tax (Not Property or Sales)

 

Development Assistance Bond Anticipation Notes, Series 2011A (Logistics and Distribution Program)

MIG 1

  Sale Amount

$34,030,000

  Expected Sale Date

06/02/11

  Rating Description

Special Tax (Not Property or Sales)

 

Opinion

NEW YORK, May 18, 2011 -- Moody's Investors Service has assigned a rating of MIG1 to the State of Ohio's $34.03 million Development Assistance Bond Anticipation Notes and to the Revitalization Project Bond Anticipation Notes. The notes, expected to be priced on or about June 2, are secured by net profits of the Ohio State Liquor Enterprise and proceeds will fund various state economic development programs. Moody's also affirmed the Aa2 long term rating and stable outlook on outstanding Chapter 166 bonds and the Aa3 long term rating and stable outlook on Chapter 151 bonds. The state has about $438 million of senior bonds and $154 million of subordinate-lien bonds outstanding.

SUMMARY RATING RATIONALE

While the state has proposed a restructuring of the state liquor control enterprise that would require defeasance of all outstanding State Liquor Profit Revenue, the state has covenanted to issue obligations backed by the same security as the 2011A Notes to make full payment at their maturity. Therefore, Moody's does not expect the issuance of any new security to impair or interfere with repayment of these notes.

The State of Ohio created several loan and guarantee programs to facilitate the financing of property for industry and commerce authorized by Chapter 166 of the Ohio Revised Code and authorized the financing of certain revitalization projects through Chapter 151 of the Code. The obligations issued to finance these programs, known respectively as Chapter 166 (senior lien) and 151 bonds (subordinated lien) are secured by the profits of the state-run liquor enterprise and have enjoyed historically strong coverage of pledged revenues to debt service. The State of Ohio's Division of Liquor Control serves as Ohio's sole wholesaler and retailer of liquor. It is a well managed and profitable state-run enterprise with a strong track record. Profits have remained resilient during the economic downturn and are likely to increase moderately as general spending increases.

Strengths:

oProfitability of state-run liquor enterprise; Division of Liquor Control has consistently maintained high "profitability"

oLeverage constraints

oRate covenant

oState non-impairment (business maintenance pledge)

oSteady and strong projected debt service coverage

Challenges

oProposed restructuring of certain economic development and jobs creation programs, including the use of State Liquor Control Enterprise Revenues, could impact the state's liquor enterprise

oVulnerability of revenues to increase in per-gallon tax

oConsumer demand variability, reflecting factors such as preference, economic growth and recession

oExpense growth of enterprise can erode coverage

DETAILED CREDIT ANALYSIS

LIQUOR PROFITS BONDS SECURED BY NET PROFITS OF STATE ENTERPRISE

Ohio issues both senior- and subordinate-lien bonds and notes backed by net profits from the State Liquor Enterprise, a government-run monopoly described further below. The current issues, rated MIG1, consist of senior-lien notes, which are authorized by Chapter 166 of the Ohio Revised Code and subordinate-lien notes (also rated MIG1) authorized by Chapter 151. The new notes will be on parity with existing debt issued under the respective liens. While the security for the notes is net liquor profits, we expect the notes to be taken out with either long term bonds or additional notes upon maturity. Moody's tracks all rated BANs as they mature to ensure that issuers are prepared to take out those BANs on a timely basis.

The senior-lien additional bonds test requires that actual revenues provide 2.5 times coverage of maximum annual debt service (MADS). The subordinate-lien additional bonds test is 2.0 times coverage of MADS.

GOVERNMENTAL ENTERPRISE CONTROLS ALL OF OHIO LIQUOR SALES

The State Liquor Enterprise, which has been in operation since 1934, serves as Ohio's sole wholesaler and retailer of liquor, defined as beverages with more than 21% alcohol by volume. The enterprise is overseen by the Department of Commerce's Division of Liquor Control. It currently sells liquor through 452 privately owned agency stores -- supermarkets or smaller establishments that also sell other beverages and food. Agency stores are chosen by the Division of Liquor Control and receive commissions of 6% for retail sales and 4% on wholesale transactions (sales to bars and restaurants). The division sets the prices and hours of operation, and although the agency stores do not own the liquor on their shelves, they are responsible for loss and can select varieties to match local demand. Since late 2004, the state has allowed Sunday sales in localities where voters have authorized them. About 45% of agency stores currently sell liquor on Sunday, and the division has not perceived a significant impact on overall sales as a result. There have been periodic legislative proposals to end state control over liquor sales. Because termination of state control would eliminate pledged revenues, Ohio has covenanted to defease outstanding net liquor profits debt before taking such action.

The State of Ohio is in the process of restructuring certain economic development and jobs creation programs including changes to the use of State Liquor Control Enterprise Revenues. A new program - JobsOhio - would be funded through the sale of the liquor enterprise and would require redemption and defeasance of all outstanding State Liquor Profit Revenue Bonds and Notes issued under Chapter 166 and Chapter 151. The Notes are anticipated to be redeemed by the issuance of new bonds to be issued under the JobsOhio program and to be secured by State Liquor Enterprise Revenues. If the redemption via the new security does not occur prior to March 19, 2012 (approximately 75 days before the June 1, 2012 BAN maturity), the state will initiate the process to take out the Notes through the issuance of additional Chapter 166 and Chapter 151 Liquor Profit Bonds or Notes to be issued under the same Statutory, Constitutional and Indenture Provisions as its outstanding debt and close mid-May 2012.

2010 RESULTS BEAT REVISED FORECASTS; PROJECTIONS ARE STILL DOWN FROM RECENT YEARS

2010 profits ended up about 2% above fiscal year 2009 at $228.8 million, handily beating revised forecasts of 0.6% growth, but growth was considerably lower than the five year average of 6.9%. Growth in profits has moderated in recent years due to increasing consumer preference for cheaper - and less profitable - spirits and reduced wholesale demand caused by the recession's impact on bars and restaurants. The Division of Liquor control has responded to declining profit growth by locating agencies more conveniently to population centers and has been successful at maintaining profitability at about 30% of gross sales despite the fact that no advertising is allowed. Pledged revenues are net of a state gallonage tax, the cost of goods sold, and division operating expenses.

Current growth projections for pledged revenues for 2011, 2012 and 2013 are 2.0%, 1.6% and 2.0% respectively. The Division is also expecting an increase in operating expenses over the next several years due to the phased-in purchase and implementation of a new financial and inventory computer system which will allow for greater control over and analysis of inventories.

PLEDGED REVENUES PROVIDE STRONG DEBT SERVICE COVERAGE

Ohio's liquor profits currently provide an ample buffer against adverse economic conditions. Actual 2010 pledged revenues of $228.8 million were 4.5 times projected senior (Chapter 166) MADS for 2011 including the current issue of Chapter 166 bonds, 7.6 times on the projected subordinate debt service (Chapter 151) including the current issue, and 3.1 times on a combined basis.

The state can issue additional Chapter 166 bonds or notes up to a statutory debt service cap of $63 million or rolling outstanding principal limit of $630 million. Borrowing up to the $63 million of debt service cap would reduce Chapter 166 actual 2010 MADS coverage to about 3.6 times. Because the cap is statutory, it is less binding than the additional bonds tests (requiring 2.5 times coverage for the senior bonds). The state can issue additional Chapter 151 bonds or notes up to a statutory rolling outstanding principal limit of $400 million and an annual issuance limit of $50 million per year plus unused "carry forward" capacity.

RATE COVENANT AND SET-ASIDE REQUIREMENT MITIGATE RISKS

The state covenants both to retain statutory authority for liquor sales sufficient for debt service and to set liquor prices such that pledged revenues remain at least 1.1 times the highest aggregate debt service charges in any subsequent fiscal year for the senior- and subordinate-lien bonds. If pledged liquor profits are less, the treasurer must engage a nationally recognized accounting firm to determine the amount needed to meet the coverage requirements in the next fiscal year. If pledged liquor profits fall below 1.1 times MADS, it will not constitute a default under the bond documents. An additional bondholder protection is the requirement for monthly debt service account deposits, generally equal to 1/6 the next semi-annual interest payment and 1/12 the next annual principal payment. This mitigates risk of non-payment caused by a short-term interruption of pledged revenues that might otherwise be covered by a debt service reserve fund.

Outlook

The outlook for the Ohio's net liquor profits bonds is stable. Moody's expects the state to act on its covenant to keep net liquor profits at least equal to 1.1 times maximum annual debt service for the senior and subordinate lien bonds, and for liquor sales to continue their moderate growth over the next several years, but will be monitoring the progress of the proposed economic development and liquor enterprise restructurings and defeasance.

What could move the ratings -- Up:

oClosing of liens to additional debt issuance

oStronger additional bonds tests

oCreation of a debt service reserve fund

What could move the ratings -- Down:

oDisruption in liquor profits due to restructuring of economic development programs or liquor enterprise

oReduced liquor sales caused by changing consumer attitudes, economic conditions or tax law revisions resulting in deterioration in coverage

oSignificant increases in gallonage tax deducted from pledged revenues for general state purpose or legislation reducing the portion of liquor sales in Ohio handled by the government

oSignificant turmoil in the management of finances or inventory related to the implementation of the new computer system negatively affecting management or operations

The rating on the current issue was assigned by evaluating factors we believe are relevant to the credit profile of the issuer, such as i) the business risk and competitive position of the issuer versus others within its industry or sector, ii) the capital structure and financial risk of the issuer, iii) the projected performance of the issuer over the near to intermediate term, iv) the issuer's history of achieving consistent operating performance and meeting budget or financial plan goals, v) the debt service coverage provided by such revenue stream, vii) the legal structure that documents the revenue stream and the source of payment, and viii) the issuer's management and governance structure related to the payment. These attributes were compared against other issuers both within and outside of the core peer group. The bond's ratings are believed to be comparable to ratings assigned to other issuers of similar credit risk.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, public information, confidential and proprietary Moody's Investors Service information, and confidential and proprietary Moody's Analytics information.

Moody's Investors Service considers the quality of information available on the credit satisfactory for the purposes of assigning a credit rating.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Analysts

Lisa Heller
Analyst
Public Finance Group
Moody's Investors Service

Edward Hampton
Backup Analyst
Public Finance Group
Moody's Investors Service

Contacts

Journalists: (212) 553-0376
Research Clients: (212) 553-1653


Moody's Investors Service
250 Greenwich Street
New York, NY 10007
USA

MOODY'S ASSIGNS MIG1 RATINGS TO $34.03 MILLION OF OHIO DEVELOPMENT ASSISTANCE BOND ANTICIPATION NOTES (LOGISTICS AND DISTRIBUTION PROGRAM) AND TO $50 MILLION OHIO REVITALIZATION PROJECT BOND ANTICIPATION NOTES
No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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