CHICAGO – With underwriting desks back up and running and investor appetites whetted after a lack of primary paper last week, Wisconsin jumped into the market Monday with its taxable $251 million appropriation pledge-backed refunding.
The bonds will pay off a bullet maturity due in May from its 2003 pension-related debt sale. Jefferies & Co. is the senior manager with Citi and Samuel A. Ramirez & Co. serving as co-senior managers. Acacia Financial Group Inc. is the adviser and Quarles & Brady LLP is bond counsel.
The state could wait to restructure the bullet as it doesn’t come due until May, but with rates so attractive officials decided in recent weeks to act. The deal was slated to sell last week, ahead of the Tuesday presidential election, but like most other sizeable sales was placed on the day-to-day calendar as market participants recovered from damage inflicted on New York City by Hurricane Sandy.
“We’ve been in daily discussions with our underwriters and financial advisor and desks are back up and operations are returning to normal and investors are back in offices,” David Erdman, Wisconsin’s assistant capital finance director, said of the decision to price Monday. “We have been ready.”
The state will amortize the bullet in fixed-rate serials between 2015 and 2018 and then between 2027 and 2031 with a 10-year call. The state received early indications on orders from more than 30 potential institutional buyers.
The 2015 maturity priced at a spread of 43 basis points off three-year Treasuries, and the 2016 and 2017 priced at spreads to the five year of 38 basis points and 62 basis points, respectively, and the 2018 priced at a spread of 52 basis points over the seven year. The final maturities – benchmarked to the 30-year Treasury priced at spreads between 80 and 115 basis points, Erdman said.
The bullet maturity was part of the state’s $1.8 billion sale that cleared out its unfunded pension-related liabilities. The 10-year bullet was popular among taxable buyers, providing a very liquid, highly tradable investment comparable to a 10-year Treasury. The deal included an additional bullet maturity that the state will have to refund by May 2018.
The state’s fully funded pension system, as of its most recent valuation at the end of 2010, is one of its most positive credit features. It’s the only state to benefit from a fully funded system.
Wisconsin’s system also benefits from a unique cost and risk-sharing feature that allows for annuity payments to be altered depending on available resources. That insulates the plan from large swings in annual contribution rates or funding levels.
The deal follows quickly on the heels of the state’s $302 million new-money general obligation sale last month. The state is also eyeing some refunding candidates but has exhausted its authority to refund debt and so will seek legislative action early next year when lawmakers return for a new session.
Ahead of the refunding, all three rating agencies affirmed the low-double-A ratings assigned to the state’s $3.3 billion of debt backed by an annual appropriation from the state’s general fund. The ratings are one level below the state’s GO credit.
Fitch said the rating reflects the state’s broad and diverse economy, moderate debt levels and fully funded pensions, progress in reaching a structurally balanced budget although an ongoing deficit does remain, and minimal reserves.
Moody’s Investors Service said the credit also benefits from alternate liquidity of $1.7 billion. The stable outlook reflects “Moody's expectation that the state will continue to make appropriate adjustments as needed to maintain budget balance.”
Gov. Scott Walker’s fiscal 2012-2013 $66 billion budget relied on deep cuts in aid to local governments and increased employee payments for healthcare premiums and pensions to help close a $3.6 billion deficit. The plan did rely on a significant one-shot in the form of $339 million of debt restructuring.
The state faces ongoing litigation involving Walker’s controversial law, Wisconsin Act 10, that required higher pension and health care premium payments and stripped many unions of their collective bargaining rights. Court rulings so far have not had a state- level impact.