Wisconsin prepping refundings so it's ready to leap at right moment
Wisconsin is ready to jump into the market with a $280 million taxable general obligation refunding and a transportation refunding waiting in the wings as the state looks to capitalize on taxable demand and record low rates.
The state currently intends to use a taxable structure for the GO refunding and is working on transportation revenue refunding expected to be sized around $200 million that may also use a taxable structure, but nothing is set in stone.
“With this market, everything is under review,” said David Erdman, capital finance director. “Taxable refundings are hot in the market now but as the market settles down we will be looking at tax-exempt forward deliveries too. With this market many financing options are in play and we are looking at bonds I never thought would be candidates for refunding with 3% or lower coupons.”
Erdman embraced taxables after using the structure on a refunding last fall, the state’s first since tapping the federal government’s taxable Build America Bond program a decade ago. In addition to the savings and ability to advance refund debt, a side benefit has been increasing the state’s investor pool.
Several deals later, Erdman said the key now is to be ready to act quickly given the daily fluctuations in both tax-exempt and taxable rates and spreads that are central to achieving the escrow savings.
“You can’t complete a transaction unless you are ready, so we are getting ourselves prepared so that if the market is there” and offers the savings target “we can enter quickly,” Erdman said, likening the situation to the preparedness local and state governments are urged to undertake to deal with the COVID-19 outbreak.
The state does not yet consider the COVID-19 outbreak to be a disclosure issue but because it is evolving Erdman said his office watching for developments.
The state has authority to sell up to $300 million of transportation revenue refunding bonds. If additional GO refunding capacity is needed after the planned issue, Erdman said he would return to the Building Commission for it. The state also has a new-money state revolving fund issue for about $80 million in the works.
JPMorgan has the books on the GO refunding and Ramirez & Co. is co-senior manager. Wells Fargo is the bookrunner on the transportation deal. The SRF deal would sell competitively.
The state has $7.6 billion of outstanding GOs. The deal will be rated by Kroll Bond Rating Agency, Moody’s Investors Service, and S&P Global Ratings. The state’s GOs are rated AA-plus by Kroll, Aa1 by Moody’s, and AA by S&P. Kroll revised its outlook to positive over the summer.
Moody’s recently issued a report labeling Wisconsin’s refunding last month that terminated Libor-indexed swaps as a credit positive as it eliminates swap-related exposure to the Libor, an acronym for the London Interbank Offered Rate, transition when the index sunsets at the end of 2021.
“Elimination of Libor exposure insulates the city and the state from potential increased costs resulting from a post-sunset replacement index,” Moody’s wrote in the report on Wisconsin and Philadelphia’s actions. “Proactively addressing Libor transition risk reflects positively on the city’s and the state’s financial management, and more broadly, on their governance.”
Erdman said the office is reviewing eight proposals from financial advisors received from a request for qualifications process that closed recently. The state has three firms under current contract — Acacia Financial Group Inc., Lamont Financial Services Corp. and PFM Financial Advisors LLC. Erdman said there’s no set number of firms to be chosen under the new contract.
The GO deal is selling as the state’s latest fiscal projections call for the state’s reserve to hit more than $1 billion at the end of the current fiscal biennium.
The updated projections from the non-partisan Legislative Fiscal Bureau say the state will also now close the biennium with a general fund balance of $620 million, up by $452 million from the prior projection used for the fiscal 2020-2021 $82 billion budget adopted last year.
The Republican-controlled legislature approved a plan to tap the surplus for tax relief and to pay down debt, but Gov. Tony Evers, a Democrat, vetoed it. Lawmakers could return this spring to attempt an override or wait until the next session in 2021 to debate how it is used in the next two-year budget. The delay gives the state time to digest the potential impact of the COVID-19 on revenues.