Wisconsin Readies $965 Million Restructuring of Outstanding ARS

CHICAGO - Wisconsin is ready to enter the market as soon as tomorrow with a $965 million taxable fixed- and floating-rate restructuring of its outstanding appropriation-backed auction-rate securities, originally issued in 2003 to wipe out its pension-related unfunded liabilities.

Only a general outline of the deal's structure is set, with most structural details such as the maturity schedule still fluid and dependent on market conditions at the time of pricing, according to the state's capital finance officer, Frank Hoadley.

"There are still many moving parts," Hoadley said on Friday. "The goal is to achieve the lowest cost of capital today that provides the greatest flexibility for restructuring the transaction tomorrow. We are exploring with potential investors a structure which best serves their needs and our needs."

The original structure on the bonds that carry a final maturity in 2032 was crafted with the anticipation that it would later be restructured, though the state did not contemplate at the time that the collapse of the auction-rate market would drive the action.

It's expected that about one-third of the transaction will be converted to a fixed-rate and one-third to a variable-rate in the form of floating-rate index notes. Whether the deal will include insurance is one of the details still to be decided. XL Capital Assurance Inc. insured the original bonds. No liquidity is needed on the notes because they lack a put feature.

The deal marks the state's first use of the securities that are long-termobligations with a coupon pegged to a percentage of some index, such as the London Interbank Offered Rate. The bonds will refund all of the remaining $944.8 million of auction-rate securities that made up the B series in the 2003 issue. The remainder of the $1.8 billion transaction sold in a fixed-rate structure.

The underwriting team is marketing the taxable deal to European buyers, with the expectation that overseas banks that specialize in investing in public debt will emerge as the primary buyers. As to the marketing strategy, Hoadley would say only: "All buyers are welcome."

Citi is running the books on the transaction with Bear, Stearns & Co., Depfa First Albany Securities LLC, Morgan Stanley & Co., and Siebert Brandford Shank & Co. serving as co-seniors and another six firms rounding out the syndicate as co-managers.

Depfa was recently added to the list of co-seniors. Depfa Bank is seen as a significant potential buyer. The predecessor First Albany was a financial adviser on the original transaction but has not acted as an adviser on the issue in recent years.

The state had swapped all of the original auction-rate to a synthetic fixed-rate with five counterparties - Citibank NA, Bear Stearns Financial Products, UBS AG, JPMorgan Chase Bank NA, and Morgan Stanley Bank - in agreements entered into in 2003 and 2005.

Wisconsin hopes to retain its 2003 swap agreements. The state pays a fixed rate of 5.47% and receives one-month of the London Interbank Offered Rate from its counterparties. The state may terminate its 2005 agreements, but again Hoadley cautioned that final decisions on the swap contracts would also be made at the time of pricing.

Officials started the restructuring process last month as they saw auctions fail and rates rise as investors began to shun the products amid credit concerns, and as investment banks withdrew their support as they too worried about liquidity amid massive losses over exposure to subprime securities.

The maximum rate that the securities could be set at was 15%. Series recently auctioned have been set at rates between 7% and 10%. The original debt was sold in nine tranches that are auctioned every 28 days.

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