Fitch Rates Florida's $243.5MM Lottery Revenue Bonds 'A'.

Business Editors

NEW YORK--(BUSINESS WIRE)--Nov. 18, 2002

The State of Florida's $243,460,000 lottery revenue bonds, series 2002C, to be issued on behalf of the State Board of Education upon 18 hours' notice as early as Nov. 19, are rated 'A' by Fitch Ratings. The bonds will be due serially July 1, 2003-22, with bonds due 2013-2022 subject to designation by bidder as terms with mandatory sinking fund redemption; bonds will be callable beginning July 1, 2012 at 101%. The new bonds are on parity with $1.677 billion outstanding lottery revenue bonds.

These bonds are solely secured from a first lien on the statutory allocation (until July 1, 2002 at 38% of gross lottery revenues net of the retailers' application fees) deposited into the Educational Enhancement Trust Fund (EETF). As of July 1, the percentage of instant game ticket revenue distributed as prizes may vary, reducing the EETF distribution but a required lottery consultant's certification that the amount generated will not be less than that produced by the 38% rate and coverage of maximum debt service will continue to exceed 2 times (x) has been completed. Bonds in the amount of $2.5 billion were authorized and the legislature has appropriated $180 million of EETF revenues annually for debt service although only about $165 million is expected to be needed. Florida's voter-approved lottery began in 1988 and proceeds are constitutionally dedicated to educational purposes. Total lottery sales have approximated $2 billion in each year since inception, affording $800-$900 million annually to the EETF. Florida's lottery may be characterized as mature, experiencing slow growth.

While there are definable weaknesses in lottery profits as a source of bond security, including its discretionary nature as well as the potential for changing tastes or the introduction and availability, either within or outside the state of other forms of gaming, there are offsets to the inherent uncertainties. Since 1989, annual coverage of projected maximum debt service for the full $2.5 billion capital program has approximated 4.5-5.0x, affording comfort. While revenues declined slightly in two of the past ten years, gains have been steady since fiscal 1998, 1.2% in fiscal 2001 and 2.1% in fiscal 2002, affording over $900 million allocated to the EETF in each of the past three years. The recent gains largely reflect the re-introduction of a game, and changes to Lotto (accounting for some 37% of ticket sales) which generated larger jackpots and rollovers, thus stimulating sales. Growth of lottery sales revenue was slightly upwardly revised in January 2002, for an estimated increase of 1.8% in fiscal 2002, which was achieved. In October, projections for 2003 and 2004 were revised to reflect higher ticket sales and prizes but revenues for ERTF in 2003 remained the same and 2004 was lowered 2.7%.

Security is additionally supported by a 3x additional bonds' test and a non-impairment clause ensuring that any alteration from the 38% allocation to the EETF requires a minimum of 2x coverage. The debt service reserve requirement, maximum annual debt service, will continue to be met through purchase of a surety bond. The state has also covenanted that any other similar state gaming revenues will first be applied to debt service on lottery bonds. While the enabling legislation allows 30-year bonds, issuance of 20-year bonds with level debt service has been legislatively directed, a more appropriate term in light of the long-term uncertainties of the securing revenue stream. Although $444 million bonds remain authorized, this is expected to be the final issuance of lottery bonds as $2.5 billion has been expended for the programs.