Ohio Starts Retail Orders on Liquor Bonds, Including BABs

CHICAGO - Ohio will take retail orders today on $50 million of liquor-profit backed revenue bonds that include a tax-exempt series and the state's first taxable Build America Bonds to fund a new infrastructure program established in Gov. Ted Strickland's $1.6 billion jobs package last year.

Institutional pricing is scheduled on Wednesday. Goldman, Sachs & Co. is the book-running senior manager and Siebert Brandford Shank & Co. is co-senior. Fifth Third Securities Inc. and Merrill Lynch & Co. are co-managers. Public Financial Management Inc. is financial adviser and Squire, Sanders & Dempsey LLP is bond counsel.

The Chapter 166 Development Assistance debt - being sold through the Ohio Treasurer Kevin L. Boyce's office - is divided into two series, the first for $26.1 million of tax-exempt bonds that will mature serially in the intermediate term and $23.9 million of taxable bonds that mature serially between 2022 and 2028.

The split series is designed to capitalize on the economic benefits of the federal stimulus' BAB program on the long end of the yield curve. Based on the latest pricing scales, the state expects to sell the taxable piece in the final seven maturities.

"We don't know exactly where the split will be that will allow us to achieve the lowest cost of borrowing," said Ohio debt coordinator Kurt Kauffman. The state will apply for the federal government's 35% direct-pay interest subsidy offered through the BAB program with overall savings estimated at between $700,000 and $1 million.

Under tentative redemption features, both series are callable at par in 10 years, but the Series B also includes an extraordinary optional redemption if the federal government withholds the subsidy.

The bonds carry ratings of Aa3 from Moody's Investors Service, A-plus from Fitch Ratings and AA from Standard & Poor's. The bonds are secured by a senior-lien pledge of the Ohio State Liquor Enterprise's net profits and are on parity with $285 million of existing debt. Another $122 million, under the Chapter 151 program, is backed by the same security but on a subordinate level. Ohio became the sole wholesaler and retailer of liquor in the state after the 1933 repeal of Prohibition.

"The rating acknowledges the pledged revenues' growth in recent years as well as vulnerability to factors such as increased leverage, tax law changes or weakening consumer spending, which could erode debt-service coverage over time," Moody's wrote. Pledged revenues grew at an annual rate of 8% over the last five years and at $213 million in 2008 provided seven times coverage.

Chapter 166 bonds are issued for five economic development programs while the Chapter 151 bonds are issued for brownfield revitalization projects. The issuance is the first under the new logistics and distribution infrastructure fund program.

The governor's stimulus program last year expanded the scope of projects that could be funded by Chapter 166 bonds to include transportation-related investments and increased the debt limits. Proceeds will fund loans aimed at improving the state's roads, bridges, railroads and ports.

Ohio faces what could be a $1 billion deficit in the current budget. Meanwhile, lawmakers are still working on a new $54 billion budget for the next two-year budget cycle. Strickland has proposed eliminating what was a $7 billion deficit through federal stimulus funds, cuts, tapping reserves, refinancing and debt.

The state closed late last month on the first piece of the debt restructuring that pushed off $250 million of maturities coming due in fiscal 2009 and 2010 to 2012 through 2021. "We spread it out proportionately through the existing maturity schedule," Kauffman said. Another $200 million will be restructured next spring.

Ohio has a AA-plus rating and negative outlook from Fitch, a Aa1 and negative outlook from Moody's, and a AA-plus and stable outlook from Standard & Poor's.

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