CHICAGO – Wisconsin will test a new bidding requirement in its $435 million competitive sale next week by setting a minimum coupon on the final five maturities of the 20-year paper.
Bids submitted on Tuesday of next week must offer an interest rate of 4% or greater on bonds maturing after May 1, 2019. The final maturity is in 2033. The goal is to better realize the value of the 10-year call on the bonds which may not necessarily be reflected in the true interest cost calculation that determines the bidding results.
“We will see how it goes. We thought going this route allowed the underwriters the most flexibility in submitting a competitive bid and we will evaluate it after we see the bids,” said assistant capital finance director David Erdman.
The state finance team evaluated several options that included extending the rule to all the callable maturities and imposing a higher coupon rate before settling on the 4% minimum on the final five maturities, he added.
The bidding will be conducted through Ipreo’s Parity electronic bidding system. Ipreo will roll out in the coming months a new bid award type known as TICPlus which factors call options into the calculation to find the lowest cost, according to Andrew Kalotay Associates. His firm developed the idea which was reported on last week by The Bond Buyer.
Most competitive awards are made based on the TIC calculation which considers the time value of money to determine an all-in cost of borrowing. It is defined as the rate, compounded semi-annually, necessary to discount the amounts payable on the respective principal and interest payment dates to the purchase price. It does not place a value on call options that could influence issuer decisions on funding and refundings.
In explaining the development of the new option, Kalotay said he noticed after reviewing competitive transactions that the bonds proposed to be sold at or close to par do better than the bonds that have high coupons and a high degree of optionality. With all other variables being equal, he added, the higher the coupon, the greater the value of the call option. The goal is give issuers a more informed look at their options for the competitive bid.
Proceeds from Wisconsin’s sale will finance “bricks and mortar” projects, Erdman said. The state had considered two smaller issues but arbitrage penalties on the invested bond proceeds have shrunk in recent months so the state decided “to take advantage of the strong market we have” and go ahead with a larger sale. The bond proceeds along with a $60 million note issue will cover the state’s capital funding needs for six months.
The deal will mark the first under newly named capital finance director Kevin Taylor, a fiscal consultant and former public finance banker and executive director of the Indianapolis Local Public Improvement Bond Bank. He will take the reins of the office on Monday, filling the shoes of Frank Hoadley who held the position for more than 25 years before retiring at the end February. A retirement party is tentatively set for May 15 in Madison.
Rating agencies have not yet released updated reports on the sale. Ahead of a GO issue last fall, all three affirmed the state’s mid-double-A level ratings and stable outlooks. The rating is driven by moderate debt levels, fully funded pensions, and a broad and diverse economy.
The state’s challenges remain an ongoing structural imbalance and minimally funded reserves. The state expects to close out the current fiscal year June 30 with a balance of $484 million and $125 million in reserves.
Walker’s proposed two-year $68 billion operating budget would close out both years with a positive ending balance but the state will carry a structural imbalance of about $200 million. Walker has proposed more than $2 billion in new borrowing for projects in his operating and capital budgets. His bonding plans have met resistance from his fellow Republicans who control the Legislature.