Wisconsin hits gas on a transportation refunding

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CHICAGO – Wisconsin is joining issuers speeding up advance refunding deals that are under threat by both the House and Senate versions of tax reform.

Faced with the possibility that the tax code’s provision allowing for one advance refunding of bonds could be eliminated in the New Year, Wisconsin will come to market next week with $375 million of advance refunding and cross-over refunding transportation revenue bonds, said capital finance director Dave Erdman.

The refunding probably would have occurred in early 2018 given current market rates, but Erdman said “we decided because of the proposals in the tax bills that we should complete the transaction now.”

He added the state wanted to get on the calendar sooner rather than later in December given the expectation that the calendar will build. Erdman said the state assembled the deal team and pulled together the transaction in the last two weeks.

The bonds would mature from 2020 to 2032. RBC Capital Markets and Ramirez & Co. Inc. are senior managers. Robert W. Baird & Co. is advising the state. Quarles & Brady LLP is bond counsel.

The bonds carry existing ratings of Aa2 from Moody’s Investors Service, a AA-plus from Fitch Ratings and S&P Global Ratings, and a AAA from Kroll Bond Rating Agency. The state was last in the market with a transportation revenue deal in the spring, when it issued new money and refunding bonds.

The credit is supported by a first lien pledge of program income which includes vehicle registration fees and other vehicle registration related fees. Pledged income flows directly to a redemption fund that’s operated separately from the state’s transportation fund which is not pledged.

Vehicle registration fees make up more than 80% of the income pledged to bond repayment with title transaction and other vehicle registration related fees making up the rest.

Maximum annual debt service coverage is 3.22 times with $1.9 billion of total debt outstanding under the program established in 1986 and $89 million of subordinated commercial paper. Debt service is not subject to appropriation, and the state pledges not to limit terms of repayment or impair bondholder rights.

Moody’s affirmed the rating this week, saying it reflects a “conservative debt structure and adequate leverage constraint” along with the state’s “proven track record of active program management, including increasing fees when necessary.

The state’s “substantial” transportation needs which has the potential to pressure debt service coverage from current and projected levels through additional debt issuance offset the credit’s strengths, S&P analyst Carole Spain said in the rating agency’s May report.

The state’s $76 billion, two-year budget for the fiscal biennium that began July 1 was held up for two months primarily due to the GOP majority leadership’s inability to settle on transportation funding levels and how to pay them.

Gov. Scott Walker, also a Republican, and leaders finally settled on a plan that relied on limited borrowing, some project delays, and raising annual fees on hybrid and electric vehicles. Democrats slammed the plan saying it failed to solve the state’s long-term transportation funding shortfall.

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Primary bond market State of Wisconsin Wisconsin