CHICAGO — Ohio will enter the market four times over the next week with a spate of deals to finance economic development and job-creation projects.
Two of the deals feature $84 million of bond anticipation notes that are backed by profits from the state-controlled liquor distribution system.
The note transactions come as the General Assembly is expected to approve a final two-year, $55.6 billion general fund budget that features Gov. John Kasich’s high-profile proposal to privatize the state’s lucrative liquor system, among other assets.
The other two deals feature $90 million of long-term general obligation bonds scheduled to price next week.
A $50 million taxable GO bond issue will finance a popular technology jobs-creation program called Third Frontier Research and Development. At the same time, Ohio will price $40 million of tax-exempt GOs for a job-site readiness program that allows the state to acquire and improve land to attract new businesses.
Rating agencies affirmed their double-A-plus ratings on Ohio ahead of the sales.
Moody’s Investors Service and Standard & Poor’s maintain negative outlooks on the state, warning of its slow economic recovery, lack of financial flexibility, and heavy use of one-time revenue measures to balance the current budget and some of the proposed budget now before lawmakers.
The House passed a $55.5 billion budget bill two weeks ago. The Senate Finance Committee is expected to unveil a draft budget bill as soon as today, with final votes expected next week.
Most of the proposed one-time revenue measures can be found in the first year of the two-year spending plan, noted Fitch Ratings analyst Marcy Block.
“Our chief concern is to make sure that their budget is balanced and from what we’ve seen it does appear to balance out,” Block said. “We’re also concerned about the amount of recurring revenues they’re able to bring, and in the second year the one-time sources [decline], so that definitely brings a level of comfort.”
She added that Ohio, like many states, is starting to enjoy an uptick in revenue and other key economic measures, such as unemployment and job performance. “That also brings some comfort that their revenue targets are going to be hit,” Block said.
In addition to the liquor enterprise proposal, the current budget proposal features a plan to privatize a handful of prisons and the authority for the state to sell or lease the Ohio Turnpike.
The Senate will also reportedly consider a bill to privatize the state lottery, a proposal supported by Kasich but not formally included in the House budget bill.
The House’s spending plan incorporates Kasich’s proposal to save general fund dollars next year by pushing off $440 million of debt service payments due in 2012 and use that money for general fund services. The state would make the delayed payments from 2015 through 2025.
Lawmakers need to approve a final budget by June 30. A capital appropriations bill is typically approved between the operating budget years, and lawmakers are expected to start working on a capital bill this fall.
The proposal to lease the liquor system is the centerpiece of Kasich’s plan to eliminate a shortfall he has warned is as high as $8 billion. The $1.2 billion plan includes $500 million for the general fund next year and $700 million to defease all outstanding liquor-backed debt.
The state typically receives around $200 million annually for its general fund from the liquor system. How much it would receive in the future under the privatization plan is still under negotiation, according to officials.
Ohio has a monopoly on liquor sales, and it is one of the state’s most reliable and growing revenue sources. Many states monopolize liquor sales, but Ohio is one of the few to issue bonds backed by the profits, according to analysts.
The privatization proposal would lease the liquor system for 25 years to a newly formed, private nonprofit economic development agency called JobsOhio.
JobsOhio would be required to defease the roughly $700 million of outstanding liquor-backed bonds as required under bond covenants.
The bond anticipation notes offered this week mature in June 2012 but feature a six-month par call, a feature included in order to give the state the flexibility to defease the debt as required if it leases the asset.
If Ohio has not privatized the liquor system by the time the notes mature, they are expected to be taken out with long-term bonds.
The borrowing includes $34 million of revitalization project Bans that are secured by a senior lien on pledged liquor profits and $50 million of development assistance notes that are secured by a subordinate lien on pledged liquor profits.
Bank of America Merrill Lynch is the senior manager on both liquor deals. Peck, Shaffer & Williams LLP is bond counsel and Public Financial Management Inc. is financial adviser.
The notes are rated F1-plus by Fitch, MIG1 by Moody’s, and SP-1-plus by Standard & Poor’s.
Fitch and Standard & Poor’s maintain ratings of AA-minus on long-term liquor-backed debt and Moody’s maintains an Aa3 rating.
Next week, the state plans to price a pair of long-term bond deals that include a $50 million taxable Third Frontier issue and $40 million of tax-exempt debt for job readiness.
The bonds are rated double-A-plus based on Ohio’s GO rating. Proceeds from the taxable bonds will finance the Third Frontier jobs program. Voters have twice authorized the state to borrow — up to $1.2 billion — to finance the program.
Ohio debt officials said early-June sales dates historically works well.
“A lot of redemptions take place June 1 in Ohio, and there is a lot of cash available and people looking to reinvest,” said Larry Scurlock, the state’s assistant debt manager.
After next week’s sale, the state will have sold $380 million of Third Frontier bonds out of the $1.2 billion authorized. The Ohio Public Facilities Commission is the issuer and Citi is senior manager. Acacia Financial Group Inc. is financial adviser and Vorys, Sater, Seymour and Pease LLP and Lumpkin McCrary LLP are bond counsel.
The $40 million of job-readiness bonds will finance projects to purchase and improve land for businesses looking for new sites. The program was first authorized in November 2005 and it is the state’s third issuance for the program. The program has a cap of $150 million, with $35 million remaining after next week’s sale, Scurlock said.
The finance team is the same for both deals.
Moody’s rates Ohio Aa1. Standard & Poor’s and Fitch rate it an equivalent AA-plus.