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Unresolved Lawsuit Could Threaten Investor Interest in $1.5B Ohio Liquor Bonds

JAN 18, 2013 4:44pm ET
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CHICAGO — As the JobsOhio Beverage System sells $1.5 billion of bonds this week to finance a long-term lease of Ohio’s liquor system, investors say a chief concern is an unsettled lawsuit challenging the privatization and lack of a back-up pledge in case of an unfavorable court ruling.

JobsOhio, a newly created private, nonprofit agency dedicated to promoting economic development across the state, is expected to price the split-rated bonds Tuesday or Wednesday. The bulk of the bonds -- $1.1 billion -- are taxable, reflecting in part the taxable structure of outstanding liquor bonds that need to be defeased. The Series A bonds, totaling $423 million, are tax-exempt.

It’s one of Ohio’s largest deals to date.

The agency will pay the state $500 million in upfront cash for a 25-year lease of the state’s lucrative liquor distribution system. Another $744 million of taxable bonds will be used to defease outstanding liquor-backed bonds. The remaining $225 million will be used for job creation efforts.

The state has delayed the borrowing more than a year due to a lawsuit challenging the constitutionality of JobsOhio and the liquor lease.

The lawsuit, filed by a liberal nonprofit group called ProgressOhio and two Democratic legislators, was dismissed in the lower courts for lack of standing. ProgressOhio has filed an appeal with the state Supreme Court, which has not yet indicated whether it will consider the case.

Ohio decided two weeks ago to come to market despite the ongoing litigation, citing relatively strong ratings from two major ratings agencies.  Moody’s Investors Service rates the bonds A2, while Standard & Poor’s rates them AA.

The finance team promoted the deal last week during a four-city road show in New York, Boston, Columbus and Chicago and in London. Preliminary bond documents include five pages of special notices to international investors.

But investors and analysts say the unsettled court ruling remains a big concern. The deal does not include protections, such as early redemption or a back-up pledge, in case a court rules against the state.

“Many potential investors were hoping there would be some stronger language that if the litigation did not go in favor of JobsOhio, there would be some kind of assurance for bondholders,” said Tamara Lowin, senior fixed-income analyst at Belle Haven Investments, who attended the road show last week. “There was surprise that language wasn’t built in.”

Analyst Robert Donahue with Municipal Market Advisors Inc. also noted that the structure lacks investor protections in case of an adverse court ruling.

“I don’t see anything that insulates them,” Donahue said. But he said that in similar cases, courts have taken bondholders into account.

Beth Foos, a municipal credit analyst at Morningstar Inc., also noted the unresolved lawsuit.

“One of the major concerns for investors is the unresolved court litigation,” Foos said. “That’s something that folks should take notice of.”

Market participants said the structure and pledge backing the bonds appear strong.

Revenues from the past 18 months generated 2.4 times of maximum annual debt service coverage, which is $107.1 million. JobsOhio has also promised to hire a consultant if coverage falls below 1.35 times. 

The Ohio budget office last week reported the system brought in a record-setting $251 million of revenue in fiscal 2012.

“Liquor sales don’t usually wane a lot in a down economy,” Foos said. “And even so, we continue to see signs of some economic recovery in the Midwest, albeit slowly. I don’t see any major concerns -- it’s just whether or not the issue is resolved decisively and quickly in the courts.”

JP Morgan and Citigroup are joint book running senior managers on the deal.

The $423 million of tax-exempt debt includes serial bonds that mature from 2015 through 2023 and $378 million of term bonds that mature in 2038.

The $1.1 billion of taxable debt includes serial bonds that mature through 2023 as well as $357 million of term bonds due in 2029 and $382 million of term bonds due in 2035.

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