New York - Jan. 23, 2012  ---Fitch Ratings believes yesterday's announcement by Hovensa LLC (rated 'BB-' with a Stable Outlook) that it will cease refinery operations on the island of St. Croix will have a detrimental impact on the economy and financial operations of the United States Virgin Islands (USVI; implied general obligation [GO] bond rating of 'BB+' with a Stable Outlook). Fitch expects to complete a review of the associated bond ratings of the USVI some time in February, following expected action to address a current fiscal year (FY) budget gap and receipt of additional information on the Hovensa closure.

According to Hovensa, the refinery employs about 1,200 people and has approximately 960 contractors on St. Croix. The firm states that it now intends to operate the facility as an oil storage terminal and will employ about 100 people, including contractors.

In addition to being the USVI's largest employer, Hovensa's activities have been a large source of tax revenues to the USVI. The governor of the USVI has estimated the revenue impact to the government to be about $60 million annually on a General Fund budget of approximately $700 million. Further, as the largest supplier of on-island refined oil, Fitch believes there is a potential for increases in energy and fuel costs in the USVI which could also have negative economic impacts.

The closure could threaten not only the 'BB+' implied GO rating on the USVI but also the 'BBB' rating on the Virgin Island Public Finance Authority (VIPFA) bonds secured by gross receipts taxes, should pledged revenues be reduced by a significant downturn in the USVI's economy. Bonds issued by VIPFA that are secured by federal excise taxes based on sales in the U.S. of USVI rum are more insulated from economic and financial pressures of the USVI. Payment on those bonds (senior indenture rated 'BBB+' on the senior lien and 'BBB' on the junior lien, and Diageo and Cruzan indentures each rated 'BBB', all with Stable Outlooks) is ultimately dependent on continuation of rum production at both facilities.

Fitch is concerned that a wide ranging impact on the USVI from the closure could compound an already unbalanced General Fund financial position and delay prospects for fiscal stabilization. For FY 2012, the USVI has projected a budget gap of about $67 million (prior to Hovensa's announcement); FY 2011 is reported to have ended with a $26.5 million budget deficit. The USVI is undertaking multiple rounds of budget negotiations to eliminate the current year's gap, with almost 500 employees eliminated to date. An additional 500 employee terminations are possible by the end of January along with various fee and tax increases.

Additional information is available on www.fitchratings.com.