The agency that operates Milwaukee’s convention center completed a debt restructuring Tuesday that provides breathing room to manage through the loss of convention business and tax revenue from the COVID-19-driven shutdown.
The taxable deal for about $82 million benefitted from insurance and a state backup pledge on a portion.
The district accomplished its restructuring goals with the transaction and was able to trim the deal from $88 million as rates came in better than expected, said John Mehan, a managing director at Baird, which is advising the district. “We had built in a cushion on rates so that helped drive down the size,” Mehan said.
The district was planning on a Wednesday sale but moved it up after marketing it over the last week. “We had good investor interest and decided with other deals coming this week let’s hit the market today,” Mehan said.
At spreads of 270 basis points to 300 basis points to Treasuries the borrowing is costly, but that’s the price for a convention-related credit. “This is a tourism-related bond issue. It’s a different market,” Mehan said.
The district’s finance team opted to go with insurance on the entire deal based on investor wishes because it provided a benefit in the final price. Assured Guaranty Corp. provided the wrap.
The transaction will trim near-term debt service payments to $8.2 million from $25.1 million in fiscal 2020 with capitalized interest easing payments owed in fiscal 2021 and 2022, according to offering documents.
The restructuring also was designed to raise the amount of restricted tax revenue the agency has on hand to $14 million from $8 million for a bigger cash cushion to cover debt service and provides debt service coverage ratios that assume a worst case scenario on tax collections under scenarios laid out by consulting firm HVS.
The deal also was expected to provide a bit of financing toward the more than $400 million expansion of the convention center the Wisconsin Center District board approved in April. Proceeds will also fund a junior lien debt service reserve and capitalized interest.
“The district’s tax revenues are directly impacted by COVID-19 which will result in a material adverse change in the financial position and results of operations of the district,” warned the preliminary offering statement in which COVID-19 is referenced more than 100 times. “Although the full impact of COVID-19 is not yet known, this financing is in response to the COVID-19 pandemic” accomplishing a goal to lower debt service “to maintain the district’s financial position to cover debt service.”
Without the restructuring, the district risked triggering a state moral obligation pledge on a portion of the district’s debt which would require the state to replenish reserves.
The district has seen 86 events cancelled or postponed since March resulting in a loss of $7.5 million of revenue by year-end, according to the offering statement. The district cut salaries, implemented a hiring freeze and deferred capital spending and some vendor payments. On April 17, half the full-time employees were temporarily laid off. The tax hit through April was $5.4 million and a fiscal 2020 hit of $21 million, or 54%, is expected.
The deal offered a series for $23.8 million of taxable senior lien dedicated tax revenue bonds. The bonds were offered in a 2047 maturity that landed at a 300 basis point spread to comparable U.S. Treasuries, according to a repricing wire.
Ahead of the deal Moody’s Investors Service cut the district’s stand-alone revenue bonds by one notch to A3 and assigned a negative outlook. S&P Global Ratings cut the rating by three rungs to BBB from A and assigned a negative outlook.
A second series for $58.7 million of taxable junior lien dedicated tax revenue bonds with a 2050 maturity landed at a 270 bp spread to Treasuries, according to a repricing wire. They carried the state’s moral obligation backup and ratings of A1 with a stable outlook from Moody’s and A-plus and stable from S&P. Both ratings are notched off the state’s Aa1/AA ratings based on the moral obligation pledge.
The bonds are taxable but interest enjoys an exemption from state income taxes. After the closing, the district will have $140 million of senior and $162 million of junior lien special tax debt.
“The downgrade reflects our view of the substantial projected deterioration in the district's pledged revenue… which are made up of economically vulnerable local hotel tax revenue, food and beverage tax revenue, and car rental tax revenue," said S&P analyst David Smith.
"In addition, as a consequence of the COVID-19 pandemic, social distancing measures implemented in response to the outbreak, and the ongoing recession, pledged revenue is forecast to decline sharply in 2020, weakening coverage and significantly elevating the volatility of the district's pledged revenue composition," Smith said.
Moody's on April 7 placed the district’s A2 senior lien and A3 junior lien ratings on $136 million of debt issued in 1996, 2003, 2013, and 2016 under review for a downgrade. Both were downgraded by one notch to A3 and Baa1, respectively. The district has a total of $376 million of debt, including bonds supported by a state appropriation subject to annual approval.
The district’s bonds are secured by revenues generated by a 2.5% Basic Room Tax, a 0.5% Local Food and Beverage Tax, and a 3% Local Rental Car Tax, all of which are levied across Milwaukee County and can only be used for debt service. The bonds are additionally secured by a 7% Additional Room Tax levied in Milwaukee which is pledged first to debt service and then any lawful purpose. In addition the B series in the upcoming transaction carries the state’s moral obligation pledge.
The taxes generated $38.6 million in 2019.
The downgrade of the stand-alone ratings stemmed from Moody’s expectation of the damage to pledged revenues that will strain debt service coverage and the uncertain prospects for recovery given the pandemic’s course, potential for a resurgence of cases that could wound revenues and the ability to host conventions.
“While restructuring will provide the district with near-term fiscal relief, the situation with the pandemic is fluid, casting uncertainty on the trajectory of pledged revenues for future payments,” Moody’s said.
The bonds benefit from satisfactory legal provisions that include a debt service reserve fund, and the direct flow of tax revenue to the bond trustee from the state.
The A1 on the portion of the deal that carries the state backup reflects the commitment of the Department of Administration to request appropriation by the state legislature to replenish any draws on a debt service reserve fund. The district had warned at a recent board meeting that it was at risk of having to draw from the reserve fund later this year absent the debt restructuring.
The rating is notched several below the state as its takes into consideration the less essential nature of the Wisconsin Center District.
The district’s board signed off on the restructuring and the $420 million bond-financed convention center expansion over the objections of some members who questioned the timing amid plummeting tax revenues. The larger new money deal remains on hold. State legislation provides a moral obligation backup to up to $300 million of new money.
The board also raised the county’s hotel tax, extended an existing food and beverage tax known as the “candy bar” tax, and allowed the district to enter into a tax agreement with the city. A large portion of the new money would sell with junior-lien status and the state moral obligation. The remainder of new money would sell under a senior lien.
The district’s administration argued in favor of moving forward saying the work would create new jobs and help fuel an economic recovery from the pandemic and ensuing recession.
Morgan Stanley ran the books. Wells Fargo Securities is a co-senior manager with Academy Securities, Loop Capital Markets and Siebert Williams Shank & Co. LLC served as co-managers. Quarles & Brady served as counsel.
The 17-member board is appointed by the governor, Milwaukee County executive, Milwaukee mayor and Milwaukee Common Council president. Its members include local elected officials, legislative representatives, and members of the business community.
The expansion will double the square footage of the convention center and provide a facelift for the existing downtown space. The district estimates it would generate $12.6 billion in spending over 30 years and allow the city to remain competitive with venues in other major cities.
The 2020 Democratic National Convention is still scheduled in Milwaukee but it has been pushed back to August from July. If it should be canceled, the district expects to recoup about 50% of projected revenue it was to receive. The district’s facilities include the convention center, now known as the Wisconsin Center, the University of Wisconsin-Milwaukee Panther Arena, Miller High Life Theatre, and the Fiserv Forum.
