CHICAGO — JPMorgan said Friday it would begin pricing on Monday and Tuesday $1.5 billion of liquor-profit backed bonds issued by JobsOhio, a sale originally scheduled for the previous week but postponed after the state Supreme Court’s announced it would hear a case challenging the state law that authorizes the bond sale.
The legal uncertainty swirling around the deal will translate into a demand for extra yield, market participants said.
In addition to the central risk that comes from the possibility of an unfavorable outcome in the final court ruling, the bonds likely will be less liquid during the litigation which could drag on for months, experts said.
The state has already delayed the deal for nearly a year due to the lawsuit.
The two-series issue was originally set to price last week with Citi selling $423 million of tax-exempt bonds on Wednesday and JPMorgan selling $1.1 billion of taxable debt Thursday. As of late Friday, JPMorgan said the bonds were tentatively set to price Monday and Tuesday.
Under the deal, JobsOhio, a newly created private agency created by Gov. John Kasich to promote economic development efforts across the state, will use $500 million of the proceeds to make a one-time payment to Ohio in exchange for a 25-year lease of the state’s liquor distribution system. Another $744 million of bonds will defease outstanding liquor-profit backed bonds, with the remaining $225 million going toward economic development efforts.
But hours before the first series was set to sell last Wednesday, the court announced its decision to hear an appeal by ProgressOhio, a liberal non-profit group that last year challenged the constitutionality of the law creating JobsOhio, the agency itself, and other aspects of the liquor lease and the bond deal.
The court will consider an appeal to a lower court ruling that ProgressOhio lacks standing to bring the lawsuit. It will not rule on the merits of the case.
If the justices decide that the group has standing, the case would then go back to the lower courts.
After the court said it would hear the case, the JobsOhio finance team published a supplement to preliminary bond documents that disclosed the update to investors.
Like the original offering statement, the new disclosure assured investors that bond counsel, Squire Sanders LLP, and the state Attorney General believe the substantive claims of the lawsuit are without merit, and that the lower court’s decision to dismiss the lawsuit for lack of standing was correct.
“There’s not enough disclosure in the world” for the state to bring the deal to market before the supreme court has ruled, said one investor last week when the deal was temporarily pulled.
But the finance team then decided to put it back on the calendar for the coming week.
“I was surprised to see it pop back onto the calendar,” said Alan Schankel, head of fixed-income research and strategy at Janney Capital Markets. “But anything can be sold at a price,” he added.
“There’s a thirst for paper out there, and the flows are strong. I suspect they’ll get it done, but investors will demand some concession. The only protection investors can get is a little extra interest.”
The revenue stream itself appears strong and stable, noted Howard Cure, directed of municipal research at Evercore Wealth Management LLC. “It’s proven that in good times and bad, people are going to drink,” Cure said.
But it’s the lawsuit that poses the risk, and investors voiced concerns about it at the road show promoting the deal even before the Supreme Court announced it would take the case, Cure said.
“I get the sense that the governor is really anxious to get this deal done, and I think that this anxiousness to get this done is clouding a more prudent view of when to issue this,” he said. “If they issue now, they’re going to have some sort of premium for it,”
The ongoing litigation could mean less liquidity for investors looking to trade the securities, Cure added. “If you’re a holder of these bonds and it’s in litigation, I’m not sure how liquid it would be -- you have to be really careful about whose accounts you’re going to be putting it into.”
At least one bond attorney said it’s not uncommon to sell bonds despite pending litigation, and in the case of an unfavorable decision against the bondholders, it could boil down to disclosure.
“It’s not rare to have litigation that impacts a bond transaction,” said one attorney who asked to remain anonymous. “You can’t always stop the world because of a lawsuit. But it all depends on the facts and circumstances of the case,” the attorney said.
“If there’s an adverse decision on the merits of the case, the question is then, have [investors] been given enough information so they can properly assess what the legal risk is, and have all facts and circumstances been disclosed?”