CHICAGO - Ohio has launched what officials say is a first-of-its-kind program that creates a new state-backed credit for local government note issuers.
Their goal is to attract national buyers interested in high quality notes.
Treasury officials have spent the last few years developing the Ohio Market Access Program with local financial advisors and investment bankers. The state has so far done three deals with an OMAP wrap, all under $3 million, which they expect will be the average size of a deal. Another issue is set to price Oct. 1.
OMAP "arose out of feedback from local governments, which had difficulty accessing the market once monoline insurance went away and everyone had to pay attention to the underlying credit," deputy treasurer Seth Metcalf said in a telephone interview. "We want to homogenize all the note credits and provide more access to what should be looked at as short-term Ohio paper."
Under the program, Ohio has pledged up to $300 million a year from its own liquidity fund to back the notes in case of default. The state will issue a standby note purchase agreement for each deal, promising to purchase either a renewal note or the unpaid note at maturity if the issuer misses the payment.
Only school districts, local governments and cities are eligible for the program. The issuer will continue to choose the financial team. The credit enhancement is available only to deals with maturities of one year or less that are structured as general obligations.
The goal is to generate savings by expanding the base of buyers interested in the notes based on the new liquidity enhancement, Metcalf said.
"We want to transform the buyer base from regional to national," Metcalf said, adding that Blackrock stepped in to buy the bulk of one of the OMAP issues. "If we can get those kinds of buyers interested and comfortable with the credit, we think it will be very helpful."
The state's governments typically issue more than $1 billion a year in short-term paper, though Metcalf said he doesn't expect all those deals to be enhanced with OMAP. The program was designed in part to not interfere with existing enhancement programs, like the state's intercept program for school districts.
Standard & Poor's has assigned an SP-1-plus rating to OMAP. Analysts said the rating reflects the Treasurer of Ohio's pledge to make good on the notes and its expectation that state's liquidity fund will be sufficient.
The program is still in the pilot stage, with officials set to review the program at the end of the year, before a more aggressive launch directly to local issuers starting in the first quarter of 2015, according to Metcalf.
The Legislature authorized the program with legislation enacted in 2011.
If a government defaults, the legislation allows the state to divert collections of two revenue- local government revenue and real property taxes - to recoup the loss after Ohio covers the payment with its own cash. The philosophy is "working it out in the family rather than publicly," Metcalf said.
"Strong local governments make a strong Ohio," he said. The Madison Local School District in Lake County is set to issue $1.4 million of notes with the OMAP wrap on Oct. 1. Stifel, Nicolaus & Co. is the underwriter.
"We see the Treasurer's new Ohio Market Access Program as an important financing option for the many Ohio small issuers of general obligation bond anticipation notes that otherwise do not have access to market interest rates due primarily to credit concern," Al Baucco from Stifel, Nicolaus wrote in an email. "In the future, if interest rates begin to rise and credit spreads widen, the importance of this innovative program will only increase."
Estimated savings for two of the three issuers who have tapped the program is more than 50%, according to a state analysis. The Maple Heights school district, for example, issued $2.4 million of notes at a 0.50% interest rate compared to an estimated unenhanced rate of 1.15%, generating a 56.5% savings.
Governments also save the cost of rating agency fees.
