Wisconsin expects dual benefits from taxable refunding

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Wisconsin is prepared to issue $622 million of debt to refund taxable 2008 appropriation-backed debt in a deal that will generate savings while shedding floating-rate risk and exposure on swaps linked to Libor.

With taxable rates at attractive levels and demand high, the timing works out well for Wisconsin, said capital finance director David Erdman.

“We will mitigate the risks we are concerned about and realize a material amount of savings” with the transaction that is now on the day-to-day calendar, Erdman said.

Citi is the book-running senior manager and Barclays is the co-senior. Proceeds will also cover swap termination costs with that price tag the subject of negotiation with counterparties Citibank NA, UBS AG, and JPMorgan Chase Bank NA.

The 2008 bonds refunded debt issued in 2003 to pay unfunded accrued liabilities for sick leave conversion credits and unfunded pension liabilities for the Wisconsin Retirement System. The system is now fully funded.

Libor, an acronym for the London Interbank Offered Rate, is being phased out at the recommendation of the Alternative Reference Rates Committee created by the U.S. Federal Reserve Board and the Federal Reserve Bank of New York.

Market participants have been concerned over tax uncertainties posed by the transition. Treasury and the Internal Revenue Service earlier this month issued proposed regulations addressing adverse tax consequences from changing the terms of debt, derivatives, and other financial contracts to alternative reference rates from interbank offered rates such as Libor. The Governmental Accounting Standards Board also released new accounting and financial reporting guidance to assist state and local governments in the transition away from Libor.

Erdman said Treasury’s guidance “addresses some of the concerns the issuer community has” but there’s still worry about the conversion so “eliminating that exposure on this credit while also receiving debt service savings is a win-win for the state.”

The state recently sold a $285 million taxable general obligation refunding — its first taxable since tapping the federal government’s Build America Bond program — achieving 11% of net present value savings. The state’s building commission at a meeting this month replenished the capital finance office’s refunding authority so it has room sell another $500 million.

A new money competitive sale for $275 million of GOs is in the works for late fall.

The appropriation bonds are rated AA by Fitch Ratings and Aa2 by Moody’s Investors Service. Both are one notch below the state’s GO ratings.

The rating reflects “the slightly higher degree of optionality associated with payment of appropriation debt” with the state’s AA-plus GO rating recognizing “its considerable financial flexibility derived from its broad and diverse resource base and legal authority to control its budget, as well as a unique pension structure that contributes both to a low liability burden and lower risk of a significant increase in spending requirements in the future.”

While notched off the state’s GO rating, Moody’s said the rating also reflects “the moderately strong legal structure of this transaction and its greater essentiality.”

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Primary bond market Refunding bonds Taxable bonds State of Wisconsin Wisconsin
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