CHICAGO - Completing the process it began in March, Wisconsin wrapped up the restructuring of its nearly $1 billion portfolio of taxable auction-rate securities earlier this week with the sale to Dexia Group of $210 million of variable-rate index bonds that will refund the state's remaining ARS.

The state signed a bond purchase agreement with Dexia on Wednesday setting the price on the debt at the London Interbank Offered Rate plus 1.10%, Wisconsin capital finance director Frank Hoadley said yesterday.

The offer was brokered through underwriter Morgan Stanley.

JPMorgan and UBS Securities LLC were the auction agents on the original auction-rate securities that were part of a larger $1.8 billion appropriation-backed state bond sale in 2003 and that included nearly $1 billion of ARS, with the remainder sold as fixed rate.

Officials started the restructuring process in February as they saw auctions fail and rates rise as investors began to shun the products amid credit concerns, and as investment banks withdrew their support as they too worried about liquidity amid massive losses over exposure to subprime securities.

The maximum rate that the securities could be set at under terms of the 2003 transaction was 15%. The original debt was sold in nine tranches that were auctioned every 28 days.

The state sought to exit the auction-rate market with the restructuring while at the same time maintaining flexibility to refund the bonds in future years as bullet maturities in the original amortization schedule come due. The 2003 bonds were sold to raise money for Wisconsin's unfunded pension-related liabilities.

The state heavily marketed the restructured bonds in March to foreign buyers. European banks, such as Dexia Groupand Depfa Bank PLC, which specialize in municipal products, bought the seven of the nine auction-rate tranches that sold in March.

About $500 million of the overall refunding sold with a fixed rate, paying an average coupon of about 5.05% with a true interest cost closer to 6%. Another $300 million was sold as variable-rate index bonds with an interest rate equal to one month Libor plus 1.20%. Swaps that had been tied to the auction-rate debt remain in place on the variable-rate bonds sold in March and the debt sold earlier this week.

Wisconsin continued to explore various options on the remaining $200 million, receiving offers from foreign buyers interested in various structures, including the inclusion of some debt issued in Euros or Yen or with basis swaps, but some of the structures raised legal issues for the state given its current debt statutes. Officials eventually settled on using the same floating, index-based rate on the remaining tranche.

"This transaction gets this problem off our table," Hoadley said, referring to the collapse of the auction-rate market.

The rating agencies affirmed the appropriation credit in the high single-A category this week. Moody's Investors Service also affirmed its negative outlook on the A1 credit and the state's Aa3 general obligation rating, reflecting analysts' concerns that tnarrow operating margins and financial resources leave it "vulnerable to the impact of a declining national economy."

The credit affirmation comes Wisconsin completed work on closing a $621 million deficit in the current two-year budget due to faltering revenue collections. The state earlier this year undertook spending cuts and restructured the amortization of a short-term GO borrowing through its extendible commercial paper program, eliminating a $125 million payment that had been owed in the current budget.

Gov. Jim Doyle last week signed into law the final measures to eliminate a remaining $500 million shortfall. Those measures include $270 million of spending cuts, using $57 million in a budget reserve, and tapping some savings up front in a proposed restructuring of up to $1.7 billion of the state's 2002 tobacco bond sale.

Fitch Ratings and Standard & Poor's rate Wisconsin's GOs AA-minus, with a stable outlook.


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