CHICAGO — Wisconsin has hired Kroll Bond Ratings Agency to add a fourth rating as it readies a $500 million to $590 million general obligation refunding.
The state intends to hold a retail order period, its first in a few years, on Wednesday and then price the bonds for institutions on Thursday, said capital finance director Kevin Taylor.
"In the current credit environment, a fresh credit perspective and new set of eyes is good for bondholders and prospective investors," Taylor said Tuesday.
Kroll's report was expected to be released later Tuesday, giving Wisconsin the same double-A rating and stable outlook as the other three rating agencies.
"We have a favorable credit story to tell here, both fiscally and economically," Taylor said.
Citi is the senior manager and Ramirez & Co. Inc. is co-senior manager. Another seven firms round out the syndicate. Lamont Financial Services Corp. is advising the state and Foley & Lardner LLP is bond counsel.
The sale includes two series of bonds. The first is between $350 million and $400 million of tax-exempt bonds and the second is about $180 million of tax-exempt bonds with a forward delivery next year. The forward delivery allows for a current refunding. The state dropped plans for a third taxable refunding series based on current market conditions. The final sizing depends on interest rates at the time of pricing.
"The savings are not factored into the budget. We are just taking advantage of favorable interest rates to refund debt but are not counting on them for the operating budget," said Taylor, who took the position as head of the state's debt management earlier this year after longtime director Frank Hoadley's retirement.
Ahead of the sale, the other three rating agencies affirmed Wisconsin's ratings on about $8 billion of outstanding GO debt.
In an online roadshow posted along with the offering statement the state is stressing its improving fiscal health noted by rating agencies and underscored by a deep cut in its structural budget imbalance and rising, although still modest, reserves.
Wisconsin also cites its top ranking among states for the health of its pension system as highlighted in recent independent national reports.
The deal is the first negotiated one since Taylor took over the office and he's made some tweaks like attaching a roadshow to the offering statement, introducing new financial advisory firms to the state's qualified list, expanding its senior manager underwriting pools, and adding Kroll.
Taylor said the state won't drop any of the other three rating agencies from its list and he believes the value of the added perspective is worth the cost. Wisconsin's is the only the second state GO bond to carry a Kroll rating. It also rates Connecticut.
Taylor said he's also not eyeing any other major changes, but he and his staff will look for ways to improve on disclosure and transparency, hallmarks of Hoadley's tenure.
"We want to communicate as much information as we can to prospective buyers and thought a roadshow would be helpful," he said.
"The state has a strong history of sound prudent debt manager and practices and we are going to continue those," Taylor said. "A lot of unique financing methods and innovations have come from this office. We are going to keep those programs and where possible improve upon them."
The state introduced a form of commercial paper known as extendible municipal CP to the market which allows for an issuer to extend a maturity in the event of a failed remarketing.
Taylor said bankers have approached the state with private placement ideas and officials may weigh their future use.
The state this year conducted a routine competitive selection process to update its lists of advisors and underwriters. The state added Lamont, Wisconsin-based Robert W. Baird & Co., and Indiana-based Sycamore Advisors to its list and retained Acacia Financial Group Inc., Public Financial Management Inc., and First Southwest Co.
The state received proposals from 49 firms interested in working on negotiated sales. The state expanded its bookrunner and senior manager pools from 15 firms to 22. The state is required to sell its new-money GOs competitively but has flexibility to use negotiated sales on more complicated transactions and he doesn't expect a change in policy.
"We will do whatever is best in terms of the financing cost of capital and there are certain circumstances that are best served by a negotiated sale or a private offering," Taylor said. "But by and large, competitive new money and open market negotiated offerings are going to be the financing methods of choice."
Other financings planned this year include a $70 million commercial paper transportation borrowing and a $60 million GO commercial paper issue with both selling this fall, said assistant capital finance director David Erdman.
A master lease issue is also planned for this fall although its size is not set. The capital finance team, which includes Erdman and capital finance officer Brad Elmer, will seek State Building Commission approval next week for an issue of around $300 million of new money GOs. The state has not settled on a structure but expects a December sale date.
The two-year state budget approved earlier this year includes $2 billion of new borrowing with $409 million backed by revenue sources and the remainder carrying a GO pledge.
The $68 billion two-year budget Gov. Scott Walker signed in June also authorized up to $2 billion of GO refunding. The budget cuts income taxes by $650 million, allocates an additional $322 million in school aid, and limits property tax increases. Fitch Ratings and Standard & Poor's affirmed Wisconsin's AA rating while Moody's Investors Service affirmed the state's Aa2 rating.
"The state's Aa2 general obligation bond rating reflects an improved liquidity position highlighted by the availability of up to $1.9 billion in alternate-fund liquidity, as well as a fully funded pension system and limited OPEB liability, which eliminate these sources of long-term budgetary pressure, which many other states will have," Moody's wrote.
Offsetting its strengths is a weak financial position reflected in the negative GAAP unassigned fund balance of negative 18% in fiscal 2012 as the state balances its books on a cash basis, a past reliance on non-recurring revenue to balance budgets, and exposure to cyclical manufacturing declines.
"We believe that the state's fiscal position coming into fiscal 2014 is strong relative to its recent history," said Standard & Poor's credit analyst Gabriel Petek. "That said, several fiscal policy changes contribute to the state's projection that its finances will weaken in the years to come."
The state had forecast an ending net balance of $669.6 million at the close of fiscal 2013 last June with a final figure expected next week. The income tax cut will cut revenues in fiscal 2014 by $328 million and $320 million in fiscal 2015. The state has estimated revenue growth of under 1% this year due to the income tax rate change and 3.6% in the next fiscal year. An ending balance of $398.5 million is expected this year and then $91.3 million in fiscal 2015.
The state's budget reserve, which had been minimally funded for much of the last decade, benefitted from a deposit of $108.9 million in fiscal 2012 and an estimated $153 million from fiscal 2013, which is expected to bring its balance to $278.5 million, or about 2% of estimated fiscal 2013 general fund tax receipts, Fitch said.