Outlook Drops to Negative

Ahead of the state’s planned restructuring of its $965 million of outstanding auction-rate securities, Moody’s Investors Service on Monday revised the outlook on Wisconsin’s As3 rating to negative from stable.

The negative outlook affects $4.4 billion of general obligation debt. The rating agency also assigned an A1 to the auction-rate refunding that is backed by an annual appropriation pledge.

“The A1 rating reflects the credit standing of the state whose general obligations are rated Aa3 with a negative outlook, and the limited subject-to-appropriation nature of the security for these bonds,” Moody’s analysts wrote.

The state’s current GO rating is supported by its progress in lowering the amount of non-recurring, one-time revenue streams to balance the budget, a modest first-time infusion of $55 million in a rainy-day fund, and the fully funded nature of its pension-related funds. The rating also reflects the negative balance based on generally accepted accounting principles and its narrow liquidity.

Analysts attributed the outlook change to the recent downward revision of estimated revenue by more than $600 million in the current budget and its impact on the state’s already narrow liquidity position.

Gov. Jim Doyle recently announced several measures to scale the deficit down to $416 million. They included the savings of $125 million in debt payments from the rollover repayment of a short-term general obligation borrowing through the state’s commercial paper program. The governor and Legislature have yet to agree on how to eliminate the remaining deficit.

The ARS restructuring was expected to price as soon as yesterday. The deal will convert the state’s taxable auction-rate securities — that have seen rates shoot up into the double-digits over the last month — to a mix of fixed-rate bonds and floating rate notes. The debt was originally sold in 2003 to pay off the state’s unfunded pension liability and its sick leave credit benefit.

Fitch Ratings and Standard & Poor’s affirmed the state AA-minus GO credit with a stable outlook and A-plus on the upcoming deal.

 

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