Milwaukee enters market with time to digest a downgrade

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Milwaukee officials hope the decision to post bond notices and documents earlier than in past sales will soften the sting of a downgrade ahead its upcoming $246 million sale.

Comptroller Martin Matson’s office will take competitive bids May 2 on four tranches: $120 million of revenue anticipation notes for cash flow management, $95 million of general obligation promissory notes, $26 million of GO corporate purpose bonds, and $5 million of taxable GO corporate purpose bonds.

PFM Financial Advisors LLC is advising the city. Katten Muchin Rosenman LLP and Hurtado Zimmerman SC are bond counsel.

Ahead of the sale, S&P Global Ratings lowered Milwaukee one notch to AA-minus from AA. Fitch Ratings affirmed the city’s AA issuer and GO rating. Both outlooks are stable.

The notes carry top short-term ratings from both rating agencies. S&P also lowered the city’s sewer bonds, which carry an annual appropriation pledge, to A-plus from AA-minus.

"The downgrade reflects our view of the city's weak budgetary performance, as demonstrated by its recent trend of general fund deficits, and corresponding decline in reserves," said S&P analyst David Smith. Last year’s budget relied on $19 million in reserves. The 2019 budget assumes a $16 deficit that relies on the use of reserves.

The comptroller’s office said it understands S&P’s position on the reserve use but said it was disappointed given that the city had made its intentions known as it built up reserves with healthcare and other savings in recent years.

“We had informed the rating agencies that we would be in the process of drawing down those reserves after building them up,” said Richard Li, public debt specialist in Matson’s office. Liquidity is not an issue, as the city can also access other accounts and its debt amortization fund for liquidity purposes.

The comptroller’s office decided to post the initial notices several weeks earlier than usual and post the offering document two weeks ahead of the sale instead of its typical one week. The decision was driven by a February report by BondLink. The city uses the firm to host an investor website.

“In response to the BondLink report we are now providing notice earlier in hope that it increases demand for our paper,” Li said.

While the timing decisions were made ahead of the downgrade, Li said he hopes the extra time will give potential investors the time needed to digest the credit profile and approve it.

“With the S&P downgrade buyers need to do more due diligence,” he said. “If more buyers have approved the credit” before bankers reach out to investor clients to gauge demand that could help the bids.

Most sales are only announced when the preliminary offering statement is released a week or so ahead of the deal, BondLink said. “Investors repeatedly tell us they want a longer period than that,” the report says. “Investor engagement increases directly with the length of time of the pre-sale announcement window up to nearly two months prior to the sale date.”

BondLink said it published the report after more than a year of seeking client and investor feedback and a review of data from investor engagement with issuer sites.

“The minimum early notice period an issuer should announce their sale to the market in order to heighten investor engagement over standard levels is two weeks before the sale date,” the report said. “The optimal time period to achieve the highest levels of investor engagement is announcing approximately two months prior to the issuer’s bond sale.”

The city has a net pension liability of $586 million, which increased due to actuarial changes. The system is 90% funded.

“Should Milwaukee's fixed pension costs reach a level that creates budgetary pressure, our view of the city's debt and contingent liability profile could worsen,” S&P said.

Wisconsin's largest city has a population of nearly 600,000, which stabilized in the last census after falling 17% from 1970 to 2000.

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Primary bond market Ratings Municipal disclosure City of Milwaukee, WI BondLink Wisconsin