CHICAGO - Wisconsin named an underwriting team to lead its long-planned sale of state appropriation bonds to refund $1.4 billion of tobacco settlement debt and could be ready to enter the market by late March, capital finance director Frank Hoadley said yesterday.
The state selected as senior managers Barclays Capital, Citi, and Depfa First Albany Securities LLC to lead the sale. Barclays is the book-runner. In a change from tradition, driven by the market turmoil's ongoing impact on investment banks and their staffs, Hoadley decided last fall to put off naming a team and instead sought structuring advice from four bankers based on their experience with the state's credit and tobacco credits.
The four included Kym Arnone of Barclays, Tom Coomes and Tom Green of Citi, and Neil Flanagan of Depfa. The state is also working with financial advisers Noreen White of Acacia Financial Group Inc. and Jeanne Vanda of Public Financial Management Inc.
"We are still proceeding with a lot of preliminary work and still don't know that there will be a market opportunity for the transaction, but we won't know that if we are not in a position to move forward," Hoadley said. "There's still a big indenture and disclosure documents to complete so mechanically we are about six weeks away."
Wisconsin will take the deal to rating agencies when the structure is complete. The state's current appropriation credit is rated one notch lower than its general obligation ratings of AA from Standard & Poor's, AA-minus from Fitch Ratings, and Aa3 with a negative outlook from Moody's Investors Service.
Hoadley stressed that the bonds are a stand-alone state credit based on a pledge that debt service will be appropriated annually. It is not a backup security supporting tobacco settlement payments, or double-barreled pledge that some other issuers have used.
"There is no link with the tobacco settlement payments," Hoadley said. "In a securitization, the amortization schedule matches the flow of [tobacco settlement payments]. This has no characteristics of a securitization and when these bonds are sold they will backed only by an annual appropriation of general funds, with those appropriations being sufficient to cover debt service."
The distinction is important as pending litigation - and local, state, and federal moves to raise cigarette taxes - have dampened the prospects of future tobacco securitizations and driven up likely interest rates.
The increase in federal taxes on a pack of cigarette to $1.01 from 39 cents as part of the expansion of the State Children's Health Insurance Program signed into law last week by President Obama could cut consumption rates and in turn hurt the profits of tobacco companies. The future size of payments tobacco companies make to states under the 1998 Master Settlement Agreement is based on consumption.
Wisconsin's upcoming deal will refund the bonds that remain outstanding from the state's original $1.6 billion transaction that was issued in 2002 through the Badger Tobacco Asset Securitization Corp. securitizing the state's $5.9 billion share of the settlement.
Gov. Jim Doyle included the tobacco restructuring plan in his fiscal 2008/09 $57 billion two-year budget, but the deal had been on hold due to high interest rates that made the state's goals difficult to accomplish. Under the original plan, officials sought to refinance the bonds with the goal of generating $50 million annually to go into a permanent endowment fund to support health care and anti-smoking programs.
The plan was revised last May by Doyle and the Legislature as part of a so-called budget adjustment bill crafted to close a $527 million budget deficit. Under the revised plan, the state shifted to the appropriation pledge structure in a move to jump start the transaction.
The goal of the transaction now is to raise at least $100 million in up-front savings to establish the endowment and then $50 million in annual savings afterwards. An additional $150 million in up-front savings would go to help close the budget shortfall.
Minnesota also is working on a financing tied to tobacco settlement payments that, like Wisconsin's, will carry only an appropriation pledge. Although general funds would be pledged to repayment of the roughly $1 billion issue, the state would use its share of about $200 million in annual tobacco settlement payments to cover debt service.
Gov. Tim Pawlenty proposed the issue in his $57.6 billion budget for the next biennium. Any legislative action is not expected until a revised budget is submitted based on the state's next formal revenue forecast that is to be released in early March.
In the meantime, the state's debt manager, Kathy Kardell, said she expects soon to issue a request for proposals for financial advisers to assist the state on the potential tobacco deal and other financings.