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Ohio's $1.5B Liquor Lease Plan Advances

JAN 8, 2013 4:59pm ET
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CHICAGO — Despite unresolved litigation that has stalled the deal for a year, Ohio is moving forward with a plan to lease its liquor enterprise to a newly created private agency that will float $1.5 billion of bonds to finance the deal.

The plan calls for the nonprofit agency JobsOhio to take over the state’s lucrative liquor distribution system for 25 years and use the roughly $200 million annual revenue stream for economic development efforts.

JobsOhio is expected to come to market as soon as this month with the $1.5 billion of liquor-profit-backed bonds to finance the lease.

The group will use the proceeds for a $500 million cash payment for the state’s general fund and a $744 million to the state to defease outstanding liquor-profit-backed bonds and notes. The remaining $225 million will be used for job creation efforts.

The bond deal comes despite unresolved litigation that has stalled the transaction for more than a year, with an original bond sale scheduled for early in 2012.

JobsOhio and state officials Tuesday said they decided to move ahead with the deal after receiving ratings from Moody’s Investors Service and Standard & Poor’s.

Moody’s rated the deal A2 with a developing outlook based on the pending litigation, and Standard & Poor’s rated the bonds AA.

“It’s valid to interpret the strong ratings received from the two major ratings agencies as recognition of the soundness of this plan,” Kasich, JobsOhio, and budget director Tim Keen said in a joint press release. “By dedicating a reliable resource base to JobsOhio’s essential job-creation mission, it puts Ohio in a very strong position to continue our economic recovery.”

Moody's rates the existing senior-lien liquor bonds Aa2 and the subordinate-lien bonds Aa3.

The borrowing is expected to include two series of senior-lien liquor-profit bonds: a $322.2 million tax-exempt series and a $1.2 billion taxable series.

Citi and JPMorgan are the joint book-runners on the deal and Morgan Stanley and Bank of America Merrill Lynch are co-seniors. JobsOhio officials would not comment on the timing, but Moody’s said an expected sale date is set for Jan. 23.

Ohio has a monopoly on liquor sales, one of the state’s most reliable and growing revenue sources.

“The consumer spending behind these pledged revenues is discretionary, but a history of steady growth through recessions indicates only limited economic risk,” Moody’s said in its ratings report.

The developing outlook “indicates that near-term developments in that litigation may affect the rating,” Moody’s said.

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

Last August the state filed a request with the Supreme Court that it rule on the issue. The court rejected the request.

ProgressOhio director Brian Rothenberg said he expects a court will rule on the constitutionality of the plan.

“There’s no difference between four months ago [when the state filed its Supreme Court request] and today, and if I were an investor I’d be scratching my head,” said Rothenberg. “If something is potentially unconstitutional, eventually a court will rule on that. It’s buyer beware.”

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