Wisconsin GOs Launch Late Summer Deals

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CHICAGO - In a larger version of its spring general obligation sale, Wisconsin is planning to competitively sell $423 million of new-money GO bonds on Wednesday in a deal divided into two series with bidders able to submit tax-exempt and taxable bids on the later maturities.

The deal is the first in a series of four financings the state plans for late summer.

Wisconsin will take only tax-exempt bids on its Series C for $197.3 million that matures serially between 2012 and 2022. Broker-dealers can submit tax-exempt or taxable bids on Series D for $225.8 million of bonds that mature serially between 2023 and 2040.

The state expects the taxable bids will be lower once the federal government's 35% direct-pay interest subsidy under the Build America Bond program is factored in. The state received nine bids and netted about 17% in present-value savings by using the BAB program on a $70 million series in its May sale that also included $32 million of tax-exempt bonds, said capital finance director Frank Hoadley.

All the bonds will carry a traditional 10-year call feature. Although the state expects the BAB bids will come in lower, leaving the option for tax-exempt bids preserves the state's options should the market shift dramatically. Foley & Lardner LLP is bond counsel.

Rating agencies on Monday had not yet released updated reviews of the state's credit. The state is rated AA by Standard & Poor's, AA-minus by Fitch Ratings, and Aa3 with a negative outlook by Moody's Investors Service.

The state is required to issue its new-money GOs competitively. Hoadley said he finds "a great deal of safety and comfort" in that requirement for the upcoming sale "just in terms of avoiding criticism," given the heightened scrutiny BAB prices are receiving in initial trading activity.

While issuers can show a clear interest rate benefit in issuing taxable BABs over tax-exempt bonds, especially on later maturities, some market participants are questioning primary market prices that are still paying a penalty compared to Treasuries or comparably rated corporate bonds.

Initially market participants blamed the penalty on the novelty of BABs and their illiquidity, but significant spikes in prices in initial trading activity have raised questions over the fairness of the initial pricing, especially when the interest rates are set through negotiation.

The later series of the upcoming sale offers a rare 30-year maturity for state debt. The proceeds will finance dormitory improvement at the University of Wisconsin system, and though the debt carries the state's full faith and credit repayment pledge, it is to be retired with student fees, so extending the bonds further out allows the system to avoid fee increases.

The transaction's proceeds will also finance transportation and other capital statewide capital projects. The deal's size is driven by both a pent-up need for cash as the state scaled back new-money GO borrowing plans last December and by plans included in the state's new two-year budget.

"We broke up the deal last December because we were concerned about market capacity, and then the state adopted a budget with more bonding in it," Hoadley said. "The biggest piece is for transportation projects."

Gov. Jim Doyle earlier this summer signed into law a $61.8 billion budget for fiscal 2010-11 that authorizes $3.58 billion of bonding. It wiped out a $6.6 billion deficit through a mix of federal stimulus funds, spending cuts, tax and fee increases, and debt restructuring.

The borrowing authorization includes $285 million of debt restructuring, pushing off some near-term debt payments and refunding for interest rate savings. The state also increased the amount of borrowing for transportation-related projects, freeing up cash for the general fund.

The state will undertake the first of those restructurings late this summer with a $60 million GO refunding and a $60 million refunding of state petroleum inspection fee revenue bonds. Both will be sold through negotiation and the state has not yet named the underwriting team. Firms will be chosen from those selected to participate in the state's underwriting pools through a recently completed request for proposals process.

The state also has a $200 million new-money transportation revenue bond issue coming up late this summer that will be issued through a negotiated sale, though the team has not yet been named, Hoadley said.

In other state news this week, Doyle announced on Monday that he would not seek re-election to a third term but he will serve out his current term, which runs to January 2011. Doyle said his decision stems from his belief that governors should serve only two terms. "Leaving after eight years allows the political system a chance to rejuvenate itself," he said.

Doyle said his focus during the remainder of his term would be on job creation, economic development, health care, and education. Doyle, 63, previously served three terms as attorney general. Prior to that he was the Dane County district attorney.

He said he might regret his decision but did not intend to pull a "Brett Favre," a reference to the once-popular Green Bay Packers quarterback who flipflopped on his retirement plans.

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