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Fitch Rates Ohio Chapters 166 and 151 Bond Anticipation Notes 'F1+'

Thursday, May 17, 2012 6:25 PM


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.

SECURITY

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.


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