Regional News

Wisconsin Sets $1.5B Appropriation Deal

CHICAGO - Wisconsin hits the market this week with its long-planned $1.5 billion general fund annual appropriation-backed issue - the largest tax-exempt, fixed-rate deal since the market turmoil of last fall.

The bonds will refund 2002 bonds backed by revenue from the national tobacco settlement.

Barclays Capital is the book-running senior manager. Citi and Depfa First Albany Securities LLC are co-senior managers. Another 14 firms round out the list of co-managers.

Foley & Lardner LLP is bond counsel. Noreen White of Acacia Financial Group Inc. and Jeanne Vanda of Public Financial Management Inc. are financial advisers.

The state intends to sell a minimum of $1 billion of general fund appropriation bonds and up to $495 million of general fund appropriation bond anticipation notes. If investor interest is strong enough, Wisconsin plans to sell all of the deal as long-term, fixed-rate debt. If not, the short-term notes allow it to add money market funds to the list of potential buyers.

The return of institutional buyers to the tax-exempt market - especially on higher quality issues - has been growing over the last two months, but not to the traditional levels before last fall.

"There is a question of capacity in the current market, so the structure is designed around those capacity issues. We are going to go out with as much fixed-rate as possible at an interest rate that is acceptable," said Wisconsin capital finance director Frank Hoadley. "The notes provide us with an escape outlet, if needed, allowing us to break up the deal and sell a batch at a fixed rate at a later date."

If the state fails to attract sufficient retail and institutional interest at an "acceptable" rate on a minimum of $1 billion of fixed-rate bonds, the state would hold the deal. Because it's refunding the $1.3 billion of outstanding tobacco debt from the $1.6 billion 2002 deal, officials are in an "all-or-nothing" situation under the tobacco indenture, unable to refund single maturities or pieces of the deal, Hoadley said.

The finance team capped the note issuance at $500 million in order to ensure top short-term ratings. The two tranches of notes would mature on Oct. 8, 2009, and Jan. 8, 2010, and feature a 90-day call. The fixed-rate bonds include a mix of serial maturities and term bonds with a final maturity in 2037 and a 2019 call date beginning with the 2020 maturity.

To promote the deal, the state and its financial team have conducted meetings and road-shows with institutional investors, and Wisconsin is placing advertisements in local and national newspapers.

Hoadley declined to place a percentage on the level of retail participation the state hopes to see, but one market source suggested between 20% and 40% of the transaction could be filled by retail orders.

"There has been a huge marketing effort," said one underwriting source. "Our desk feels the whole deal can be placed at a fixed rate, but ultimately that will depend on whether the state likes the rates."

Hoadley said Wisconsin took extra marketing steps, as it does with any new credit. Although the state has a batch of appropriation-backed bonds outstanding, they are from a taxable pension deal that was marketed mostly to foreign buyers, so this transaction introduces a new credit to the domestic market.

The finance team's mantra throughout its marketing campaign has been to place the emphasis on the bonds' security - a sturdy appropriation pledge - with no reliance or tie to tobacco payment revenues

"It's a state name with a very strong appropriation mechanism," Hoadley said.

"Moody's sees a strong likelihood of timely legislative action" on the appropriation, Moody's Investors Service analysts wrote, adding that payment continues even when lawmakers are late in approving a budget. "State law provides that if an existing appropriation is not amended or repealed, it continues in effect for all subsequent fiscal years."

Wisconsin originally planned to begin taking retail orders on Friday, with an institutional pricing set for March 24, but as rumors circulated that California was planning a multibillion-dollar fixed-rate deal for that week, Wisconsin decided to move the pricing up. California on Friday announced a $4 billion deal pricing for institutions on March 25.

Ahead of the transaction, Fitch Ratings assigned the Wisconsin deal its A-plus, while Moody's assigned an A1 with a negative outlook and Standard & Poor's assigned a AA-minus.

The bonds carry the same ratings as the state's $1.8 billion of appropriation bonds issued for pension-related purposes but the upcoming transaction is being issued under its own indenture. The ratings are one notch below the state's general obligation credit. All three assigned top short-term ratings.

Officials will use proceeds of the deal to purchase back the tobacco settlement revenues that were sold to the Badger Tobacco Securitization Asset Corp. as part of the 2002 transaction. The deal securitized the state's share of payments under the 1998 settlement between 48 states and most of the large tobacco companies. The original deal was used to close a budget deficit by then-Gov. Scott McCallum.

The state expects to generate sufficient up-front savings - helped by the freeing up of the tobacco deal's reserve accounts - to provide $309 million to help close a shortfall in the current biennial budget.

Additional savings will be captured over the life of the bonds to allow Wisconsin to place $50 million annually in a special endowment for health care and anti-smoking programs. While tobacco settlement payments are not pledged to the bonds, the amount that flows to the general fund annually will be greater than annual debt service on the new issue.

Gov. Jim Doyle included the tobacco restructuring plan in his $57 billion, two-year budget for fiscal 2008-09, but the deal had been on hold due to high interest rates that made the state's goals difficult to accomplish, the original goal involving the creation of the health endowment fund.

The plan was revised last May by Doyle and the Legislature to help close a $527 million budget deficit. The state shifted to the appropriation pledge structure to jump start the transaction and a portion of the savings was directed to cover the shortfall.

Wisconsin's tobacco bonds are rated in the triple-B category, with a 2032 maturity carrying a 6.37 % interest rate. Pending litigation and local, state, and national increases in cigarette taxes have driven the prices of tobacco debt down and yields up.

Wisconsin's deficit has grown significantly since last spring due to falling revenue collections. Doyle last month proposed a $62.7 billion, two-year budget that eliminates an estimated $6 billion deficit through spending cuts, federal stimulus dollars, and a series of tax and fee increases.

"We expect that the state's current trend of fiscal discipline, which has significantly reduced structural budget deficits over the past several years, will continue and that the state will act purposefully and in a timely manner to address future budget imbalances," Standard & Poor's analyst John Kenward wrote in a report on the new deal.



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