KBRA has improved the outlook on U.S. Virgin Islands rum tax bonds from negative to stable, following a recent permanent raise in the rum cover over rate announced by the federal government. This adjustment, which increases the cover to $13.25 per proof gallon from $10.50, aims to alleviate credit pressures that stemmed from several years of declining pledged Matching Fund receipts.

The rating agency noted that the increased rate should help stabilize debt service coverage after the fiscal 2025 receipts fell below the key threshold of 2.0 times, landing at 1.83 times maximum annual debt service for the first time. KBRA expects the new cover rate will lead to MADS coverage returning to around 2.0 times shortly.

The bonds, originally issued by the Matching Fund Special Purpose Securitization Corp., have a par value of $955 million and were established to act as a bankruptcy-remote entity in 2022. The outlook for these bonds can also be influenced by trends in alcohol consumption, particularly among rum products, as there was a 9.1% drop in Virgin Islands rum sales in the U.S. during the last fiscal year compared to the previous year.

In April, KBRA had previously downgraded the outlook for these bonds due to declining coverage metrics. However, the recent increase in the excise tax on rum is seen as a positive step in providing enhanced financial support for bondholders, who enjoy a first lien on the rum tax revenues generated from sales in the United States.