Wisconsin sells its first green bonds

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Wisconsin drew 15 bids and new investor interest on its first green-designated bonds as it stepped into a growing primary market Wednesday with $80 million of its triple-A state revolving fund bonds.

Barclays submitted the winning bid on the competitive sale with a true interest cost of 2.64%. The cover bid came from Morgan Stanley at 2.68% with the remaining bids ranging from 2.69% to 2.78%.

Capital finance director David Erdman said he was pleased with the results given the number of bids.

“The cover and overall range was slightly wider than that we experienced with competitive sales in 2019, but that may reflect the active and competitive market we had in 2019,” Erdman said.

Prior to the deal, Erdman said he wanted to see at least eight bids. While the state can’t say for sure how much interest, if any, stemmed from the “green” designation, Erdman said the finance team did field some calls from investors that had passed on the credit in the past.

The yields on the environmental improvement fund revenue bonds maturing from 2021 to 2039 landed at spreads between nine basis points to 19 bps to the Municipal Market Data’s AAA benchmark. That was in line with the slightly higher spreads Wednesday. MMD-Refinitiv said it heard reports that shorter maturities were placed similar to reports heard on several other deals.

The deal was in works before the COVID-19 pandemic roiled the municipal market in a liquidity-driven investor pull back in March. The proceeds were not urgently needed, so the state held back with its eye on an opportunity to jump in when it was on a steadier footing and also at a time when Erdman hoped the deal might lend a hand on supply.

Demand began building last week and California’s sale last Thursday set the tone as it was upsized. “The market needs supply and interest rates are attractive, so this is good for both the market and for the state,” Erdman said late last week.

Wisconsin's capital finance director, David Erdman, said he can't say whether the green designation helped on pricing but said investors not seen on prior deals expressed an interest.

Proceeds will fund the state match for a clean water and safe drinking water state-revolving-funds (SRF) federal-capitalization grant and finance new pledged loans.

Fitch Ratings and S&P Global Ratings supplied the AAA ratings.

It’s the state’s first deal with the green label attached, based on the use of proceeds for environmental projects that meet eligibility for the designation, although the state did not use a third-party verifier of the green status. “With the market being fragile, this potentially appeals to a wider buyer base so it can only help,” Erdman said.

PFM Financial Advisors LLC was financial advisor and Foley & Lardner LLP was bond counsel.

Erdman credits the Federal Reserve’s intervention from plans to purchase bonds and Municipal Liquidity Facility in in the works for kick-starting the primary market even though Wisconsin is not eyeing the use of any of those tools. “Their intent is to provide liquidity so they are doing what they are supposed to doing but obviously we are not out of the wood yet,” Erdman said.

The state has two other pending deals — a $280 million taxable general obligation and $200 million transportation revenue refunding — that are more interest rate and spread sensitive but the state is ready to jump into the market with either.

Wisconsin published its first COVID-19 disclosure in a voluntary filing April 1 that also laid out information on cash balances available for temporary transfer. It outlines the “significant reductions in business, travel, and other economic activity” with the Gov. Tony Evers declaring a public health emergency last month and designation of the Department of Health Services as the lead agency to respond.

Evers closed schools and issued a safer-at-home order shuttering non-essential businesses until April 24. He recently extended it to May 26. Republicans who control the state legislature on Tuesday took legal action in an attempt to block Evers’ powers saying the order goes too far.

The state pushed off its April income tax filing deadline to coincide with the federal government’s action. The state anticipates receiving about $1.9 billion from the Coronavirus Aid, Relief, and Economic Security Act signed by President Trump March 27 to compensate for direct costs incurred to deal with the pandemic.

During a public health emergency in which DHS is designated as the lead state agency, all expenses incurred by the state or a local health department and not reimbursed from federal funds are reimbursed from a general purpose revenue sum-sufficient appropriation under the DHS budget.

DHS does not require additional authority from the Legislature to administer any funds the State receives under federal legislation related to the emergency.

“Because the effects of COVID-19 essentially started within the past month and the duration and the breadth of the effects of COVID-19 are not yet known, the total economic impact on the state, including general fund tax collections and general fund cash flows for fiscal years 2019-2020 and 2020-21, cannot be determined at this time,” the April 1 disclosure reads.

In a letter last week to President Trump pressing for more aid, Evers warned of a preliminary $2 billion revenue loss.

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