CHICAGO — After a two-day retail order period, Wisconsin offered up its $1.5 billion appropriation-backed issue to institutional investors yesterday, drawing such strong interest from buyers buoyed by the Federal Reserve’s plans to buy $300 billion of long-term Treasuries that most maturities were oversubscribed.
Market participants said the positive tone that met the deal was driven by the Federal Open Market Committee’s move to purchase $1 trillion of Treasuries and mortgage-backed securities. But the fact that the deal was only single-exempt from federal income taxes may have alienated some in-state retail investors and Wisconsin mutual funds, while the 6%-plus yields enticed others.
Barclays Capital was the book-running senior manager, with Citi and Depfa First Albany Securities LLC as co-senior managers and a long list of other firms rounding the team as co-managers and members of the selling group.
The final pricing results put to rest concerns state officials and market participants had earlier in the week over whether there was sufficient market capacity to absorb the entire deal — which was issued to refund a 2002 tobacco securitization — at yields Wisconsin finance officials found acceptable.
Market turmoil had prompted the state to include the ability to sell up to $500 million of the deal as notes with maturities in October and January, but in the end the state didn’t need the backup. The deal was the largest fixed-rate, tax-exempt transaction in nearly a year.
“We had very broad-based retail participation with a steady flow of retail orders that came in over the two days with a little spurt at the end after the Fed’s announcement,” said Wisconsin capital finance director Frank Hoadley.
With nearly $300 million of advance retail orders going into the institutional pricing yesterday, Hoadley said he was still concerned over capacity and pricing issues.
“About 15 minutes after we opened up the institutional pricing, I was breathing easier,” he said. “General demand was up and almost every maturity was oversubscribed. The Fed’s action really placed a premium on credits like the state. Treasuries are going to be very expensive so in chasing yield the next best thing was a state sovereign name.”
Although the state was still busy buying securities to establish its escrow yesterday, the final results allow it to accomplish its goals, raising $309 million up front to help close a budget gap while generating $50 million annually for a permanent health care endowment.
In repricing, the deal set a top yield of 5.87% in 2037. Yields were lowered three basis points in 2021, 2022, 2026 through 2028, and in 2036 and 2037. Yields were also lowered five basis points from 2011 through 2016, 2023 through 2025, and in 2033 and lowered seven basis points in 2017 through 2020.
The repricing scale comprised serials priced to yield from 2.14% in 2011 to 5.82% in 2029. A 2029 term bond containing $60.5 million priced as 5.75s to yield 5.82%.
One part of a 2033 split maturity comprised $100 million priced to yield 6% at par while the second part comprised $304.5 million priced as 5.75s to yield 5.95%. A 2036 maturity for $395 million was priced as 6s to yield 6.02%. A 2037 maturity was priced as 6.25s to yield 5.87%.
Since the bonds are not exempt from Wisconsin’s 6.75% maximum state income tax, the deal was more suited for a national audience than it is for in-state retail investors or Wisconsin tax-free mutual funds, which seek double-exempt paper, one portfolio manager at a large fund company noted.
“With the market improvement and the Fed buying back governments, that put a strong bid-side in the market, so the deal is catching the market at a positive time,” said Tom Howard, director and underwriter at B.C. Ziegler & Co. in Milwaukee. His firm is a member of the selling group for the deal.
Robert Miller, a senior portfolio manager at Wells Capital Management in Menomonee Falls, Wis., said he purchased short-, intermediate-, and long-term bonds from the deal for two national mutual funds and several separately managed accounts for high-net-worth investors because it offered value.
“We like the credit of the state, and even though we know they are under pressure like other states, they have a good plan in place to deal with it,” Miller said.
Despite the newness of the state’s appropriation credit, and its single exemption, Miller said the timing and the pricing of the deal won his and the market’s attention.
“We are used to buying appropriation debt and we thought this was attractive and we should add it to the portfolio,” he said.
“The timing of the deal was impeccable after the Fed meeting yesterday, and given the recent dislocation in the market,” he said.
“This week, there is $8 billion in volume and this is a large deal for the state, and even though it contributes to an already-bloated calendar, it’s getting done,” Miller added. “Given the calendar going forward and the uncertainty of the economy I think this was a good time to issue this.”
A trader whose firm was in the selling group on the deal said he put in for less than $1 million of bonds, with demand from those orders concentrated in 2024 and longer where the 6%-plus yields were available.
He said the deal got mixed reactions from retail investors depending on their state of residence. Some out-of-state investors, like those at his firm, have reservations about the unfamiliar, new credit.
“I got more requests for preliminary official statements and ratings reports than we normally do when we are selling group member,” he said.
Others, he said, jumped at the chance to earn 6% yields on the long end. “It’s a lot of bonds, but at those levels it seems priced to move to me,” the trader added.
Overall, he said, the deal fared well during a week when the market was flooded with many sizable deals and the arrival of the Fed meeting.
“Wisconsin is not a strong state for us,” he said. “With the amount of volume this week, some investors were focused on other deals. But, anytime you have that kind of rally after the Fed that always helps out tremendously,” the trader said .
“I think it will bolster the support they will see on this deal and provide more confidence in the market,” he said.
They were trying to catch the upward draft of the market and trying to cheapen up where they had balances,” Howard said . “By virtue of the fact that the market is feeling so much better, there is a reasonable chance they will get a large portion of it done, but it is a lot of bonds,” he said yesterday.
The deal was enticing for high-yield fund managers, market participants said, but, not everyone that wanted to participate in the deal could. “There has been a lot of insured stuff lately that has been attractive, so we don’t have a whole lot of cash right now,” said one high-yield fund manager.
Judging by the preliminary scale, retail order flow during the two-day advance order period Tuesday and Wednesday appeared to be heaviest in 2011 through 2021, as well as in 2024, 2029, and 2033, Howard noted. His firm was a selling group member on the deal.
Offering bifurcated coupon structures from 2016 through 2019 and in 2033 helped generate a mix of retail demand for the coupons priced at a discount or at par, and institutional demand for the higher premium coupons, Howard noted.
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.
Gov. Jim Doyle included the refunding in his fiscal 2008/09 budget, but the state last year scrapped its plans for a straight tobacco refunding as that transaction was on hold amid declining tobacco prices as investors shunned the debt amid concerns that falling consumption will continue to chip away at the size of tobacco settlement payments.
Amid the turmoil that hit underwriting firms resulting in some firms pulling out of the business and layoffs, the state abandoned its original underwriting and turned to four bankers with experience in tobacco credits or the state’s credit.
They included Kym Arnone of Barclays, Tom Coomes and Tom Green of Citi, and Neil Flanagan of Depfa. The state also worked with financial advisers Noreen White of Acacia Financial Group Inc. and Jeanne Vanda of Public Financial Management Inc. Foley & Lardner LLP was bond counsel. The state launched an aggressive campaign that including advertisements to attract retail buyers. Officials had planned to price the deal next week, but moved up the sale as California readied a $4 billion sale.
Ahead of the transaction, Fitch Ratings assigned the Wisconsin deal its A-plus, while Moody’s Investors Service assigned an A1 with a negative outlook and Standard & Poor’s assigned a AA-minus. The bonds carried the same ratings as $1.8 billion of pension-related appropriation bonds however, this week’s deal was issued under a separate indenture and represented a new credit. The bonds are rated one notch lower than the state’s general obligation credit.
The original deal was used to close a budget deficit by then-Gov. Scott McCallum — a move criticized by Doyle, who was attorney general at the time and had participated in tobacco settlement negotiations, although as governor he’s now using a portion of the deal for the same purpose.