CHICAGO — Wisconsin will enter the market as soon as Monday with roughly $250 million of general obligation refunding bonds for both traditional economic savings and to restructure debt coming due in November for budgetary relief.
Jefferies & Co. is the senior manager and Siebert Brandford Shank & Co. is co-senior. Public Financial Management Inc. is advising the state and Foley & Lardner LLP is bond counsel. About $53 million of the transaction will refund GO maturities coming due in November, pushing off their repayment to provide budgetary relief.
“The budget included assumptions for savings through the structural refunding of $233 million in general obligation bonds in fiscal 2012,” said David Erdman, assistant capital finance office director.
The fiscal 2012-13 budget relies on a total of $339 million in relief by also re-amortizing some commercial paper and extendible municipal commercial paper.
Erdman said the state would complete the GO restructuring with a spring refunding of maturities that come due in the May.
The remainder of this week’s transaction will advance refund maturities for about 9% in net present-value savings, though negative arbitrage on the escrow will cut into the economic benefits.
The state considered waiting, given the negative arbitrage, but decided to go ahead, as “the savings are still pretty significant,” Erdman said.
The state chose the teams from its updated pool of underwriters recently compiled after a request for qualifications process for negotiated transactions. It received 37 broker-dealer submissions, of which nine were placed in a book-runner pool, six in a senior manager pool, and the remainder in lower pools.
The book-runners list includes Bank of America Merrill Lynch, Barclays Capital, Citi, Goldman, Sachs & Co., JPMorgan, Jefferies & Co., Morgan Stanley, Samuel A. Ramirez & Co. and Siebert.
Erdman said the RFQ allows for the state to give the books to a firm in the senior manager pool if it floats a unique financing idea.
Ahead of the refunding issue, all three rating agencies affirmed the state’s ratings. Fitch Ratings and Standard & Poor’s assign the state’s $6.2 billion of GO debt a AA and Moody’s Investors Service rates it Aa2. All assign a stable outlook.
While the rating agencies chide the state for its continued use of one-shots in the form of the debt restructuring and fund transfers, they offered up praise for tackling its structural woes in the new budget signed by Gov. Scott Walker.
Walker and his fellow Republicans who control the Legislature relied mostly on spending cuts to eliminate a $3 billion deficit in the biennium that began July 1.
That shift towards a more solid financial footing comes at the expense of local governments, school districts, and public employees who face higher pension contributions and health care premiums.
The move ended a trend of past administrations, both Republican and Democratic, that relied heavily on non-recurring revenues like tobacco bond proceeds, debt restructuring, and accounting shifts to balance budgets on a cash basis.
That strategy led to a growing multibillion-dollar structural imbalance that occurs when recurring revenues fail to match ongoing expenses.
The new budget puts Wisconsin on course to reduce its $2.5 billion structural imbalance to $250 million.
It is expected to end the fiscal biennium with a cash balance of nearly $300 million.
The state’s ratings recognize its considerable resources, a diverse economy with an above-average manufacturing presence, and a moderate but above-average and rising debt burden.
Economic and revenue trends are on the mend, with manufacturing and services rebounding from recessionary weakness. Wisconsin’s credit profile also benefits from a fully funded pension system.
Negatives include a low level of general fund operating reserves and a large generally accepted accounting principle general fund deficit of $2.94 billion at fiscal yearend 2010.
“In our view, the budget includes significant adjustments to its spending base and represents an extension of the corrective fiscal measures undertaken in the governor’s budget repair initiative,” Standard & Poor’s analyst Gabriel Petek wrote in the agency’s report.
“For a state with low reserves, this demonstrated commitment to actively managing its budget and fiscal position are important to its credit quality.”
