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Wisconsin to Restructure $950M in ARS

CHICAGO - Faced with a spike in its borrowing costs on auction-rate securities, Wisconsin finance officials have named a financial adviser and senior members of an underwriting team to assist them in restructuring $950 million of outstanding, insured ARS this spring.

Public Financial Management Inc. is acting as the financial adviser and Citi will serve in the lead senior manager's role on any transaction. Bear, Stearns & Co., Morgan Stanley, and Siebert Brandford Shank & Co. are co-seniors.

"At this point we have a banking team together and they are concentrating on going into a different mode as quickly as possible in six to eight weeks," state capital finance director Frank Hoadley said yesterday.

Wisconsin finds itself in the same position as local and state governments across the country in grappling with a spike in interest rates on their ARS with one distinction - the state has made the information on auctions easily accessible to investors, dealers and the public. It posts updated results on the capital finance website at www.doa.state.wi.us/capitalfinance/index.asp. The Web site includes the historical results on the nine tranches of auction-rate debt issued by the state from its $1.8 billion appropriation-backed pension issue in 2003.

The auction-rate postings are not new. The state first posted them about two years ago after working out a program that allowed for the disclosure measure. The auction information is among other items including a new issuance calendar, official statements listings, and other state financial information.

Such accessibility is a rarity among issuers, according to market participants. Some issuers will disclose the information only when directly asked or at public meetings or in formal disclosure notices. An overview of all auctions in a single day is also not readily available as one dealer may not know the results of auctions managed by another.

The Municipal Securities Rulemaking Board is considering a centralized system for the collection and dissemination of critical information tied to the auction-rate market, but issuers so far have not been formally pressured to increase their disclosure.

"This is a simple matter of continuing disclosure," said Hoadley, one of the municipal market's strongest advocates of disclosure. "We felt the disclosure of auction rate results was important to investors and dealers."

The state works with a handful of dealers - including lead dealers Bear Stearns, Citi, Morgan Stanley, and UBS Securities LLC - on its nine series, and in some cases one firm might not have direct access to the results of an auction on which it did not submit bids. All of the tranches are auctioned every 28 days, with auctions held on Tuesdays and Thursdays and the fourth Wednesday of the month.

Hoadley said his finance team first noted "erratic" results last August. While rates have long hovered in the 5% to 6% range, the securities then began to price further off the London Interbank Offered Rate index.

Last week, interest rates shot up, though none has hit the maximum rate of 15% included in bond documents. XL Capital Assurance Inc., stripped of its triple-A by Fitch Ratings and Moody's Investors Service over the last month, insures the ARS.

On Feb. 12, a $100 million tranche with UBS serving as dealer jumped to 10%, or 319% of Libor, from 5.2%, or 129% of Libor a month earlier resulting in interest costs rising to $923,000 from $480,000.

On Feb. 14, a $100 million tranche was auctioned at 11.5%, or 369% of Libor, up from 4.73%, or 119% of Libor, boosting interest cost to $894,000 from $367,000. Bear Stearns is the dealer.

On Tuesday, an $118 million series was set at 10.25%, or 329% of Libor. That rate compared to last month's auction result of 4.259%, or 112% of Libor. The interest cost for the month jumped to $946,000 from $393,000. Citi is the dealer.

The numbers improved yesterday. UBS was the dealer on a $100 million tranche auctioned yesterday that received an interest rate of 7.88%, or 251% of Libor, compared to a rate last month of 5.5%, or 167% of Libor last month. Interest costs jumped to $678,000 from $427,000.

Hoadley held out little hope that investor appetite for the securities - which don't require a liquidity provider because they lack a put feature - will return quickly as investors flee exposure to risk in the face of a credit crunch following the collapse of the subprime mortgage market.

"It's a market that has served investors and issuers well for years, but investors have lost confidence," he said.

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