Fitch Rates Higher Education Policy Commission of West Virginia's $80MM Lottery Revs 'A'

NEW YORK - (BUSINESS WIRE) - Fitch Ratings assigns an 'A' rating to approximately $80 million West Virginia Higher Education Policy Commission (commission), community and technical colleges capital improvement revenue bonds, series 2009A, expected to be offered through negotiation the week of Nov. 9, 2009. The Rating Outlook is Stable.

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 revenues, the importance of the commission's projects, and the success of the lottery commission to-date in adapting to an increasingly competitive environment. The 30-year amortization of the bonds is somewhat long, given the uncertain nature of the pledged revenues.

The bonds are limited obligations of the commission, payable solely from the trust estate, which receives a statutory allocation of a portion of the profits from three of the state's five lottery games: instant and online games and a portion of net terminal income derived from racetrack video lottery. The commission, which is the successor to the Board of Directors of the state college system and the University of West Virginia Board of Trustees, was formed in June 2000 as part of a restructuring of higher education. The lottery is regulated by the West Virginia Lottery Commission.

A statutory allocation of $5 million is made to the community and technical college capital improvement fund from the state's lottery revenue fund to secure debt service on the bonds. This deposit represents a third lien on net profits deposited in the state lottery fund, subordinate to payment of School Building Debt service ($18 million) and Education, Arts, Sciences, and Tourism Debt Service ($10 million). In fiscal 2009, $170 million was credited to the state lottery fund, down from a peak of $185 million in fiscal 2007, but still providing 5.2 times (x) coverage of all debt service payable from the fund.

Although the additional bonds test is somewhat weak at 1.5x, the statutory limits on debt issuance provide adequate bond holder protection that the revenue stream will not be diluted.

The lottery operates a mix of five games, including:

--Instant or scratch-off games, which account for 7.8% of fiscal 2009 lottery sales;

--Online numbers games, 5.8% of fiscal 2009 lottery sales;

--Racetrack video lottery, 58.1% of fiscal 2009 lottery sales;

--Limited video lottery, 28.3% of fiscal 2009 lottery sales;

--Racetrack table games, which began operation in 2007.

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; sales declined 3.5% in 2008 and an additional 3.2% in 2009. Further decline is expected through fiscal 2011 as the state faces increasing competition from surrounding states. The state is projecting a continued revenue reduction over the next three years, primarily reflecting increasing gaming competition.

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Fitch Ratings, New York
Karen S. Krop, 212-908-0661
Ken Weinstein, 212-908-0571
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