CHICAGO — Seeking to lock in savings offered in the current market, Wisconsin took a step into new terrain last month by entering into a direct loan agreement with JPMorgan that will refund $278 million of debt next year.
The delayed draw date of next year was needed to preserve the tax-exemption of the general obligation refunding bonds, said assistant capital finance director David Erdman. The bonds had previously been advance refunded and federal tax rules allow for only one. The delayed draw makes the transaction, in effect, a current refunding.
The state backed off a plan to refund the bonds with taxable paper, as part a larger $560 million GO refunding it completed last fall, because interest rate and yield curve movement would have cut into the savings.
"The market today and where the yield curve is are very favorable," said state capital finance director Kevin Taylor. "We looked at all our options for a refunding, from doing it taxable to doing a forward deal. JPMorgan put in front of us the whole new idea of a delayed draw on a loan from its commercial bank with the perameters set today."
The state expects to achieve about $19 million or 7% in present value savings under terms of the deal including a commitment fee paid by the state. That's more savings than if the state had gone forward with a taxable deal. "It's hard to pass that up," Taylor said of the transaction, which is a first of its kind for the state.
The state could wait until next year when it can complete a traditional current refunding but that leaves the state open to market risks and rising rates could sap savings.
The state entered into the loan agreement on Jan. 16 with JPMorgan Chase Bank NA. The transaction is a traditional economic refunding, so the savings will be taken over a period of years tied to the bonds' maturities and not for upfront budget relief.
The state notified the market of the loan and its intention to refund the bonds in a voluntary notice filed with the Municipal Securities Rulemaking Board's EMMA website last month. It's also available on the state's capital finance website. The state intends eventually to post a disclosure on the terms of the loan.
Under terms of the agreement the loan could fall through if the state does not maintain a minimum rating level. Its interest rate could rise depending on any changes in federal tax law.
"The state of Wisconsin provides this information as it may be material to financial evaluation of one or more obligations of the state of Wisconsin," the notice reads. The state would draw on the loan if conditions of the agreement are met, and if the loan proceeds aren't drawn, the bonds will not be refunded unless "another source of funding" is obtained.
The state expects to draw proceeds of loans beginning 90 days prior to May 1, 2015. When drawn, the proceeds will be applied on May 1, 2015, to refund the state's Series 1 2005 bonds with maturities between 2017 and 2021.
For JPMorgan, the twist on the transaction is the delayed draw. Otherwise, it generally resembles the direct loans the firm and other broker-dealers with commercial bank lending abilities have increasingly been providing municipal and not-for-profit clients in recent years.
"This is something we see as a broader extension of the balance sheet products we currently offer to a range of our clients," said Tim Self, managing director and head of public finance credit origination and the portfolio management group. Traditional products span letters of credit to liquidity facilities.
Direct loans have been most prominent in the not-for-profit and healthcare sectors, but Self said he sees that reach widening to cover more clients in the general municipal space. "It's really the delayed draw feature that makes" the Wisconsin loan "innovative" from the standard, direct loans the bank has entered into with clients.
While less prominent in the bank's overall direct loan portfolio for governments and not-for-profits given the size of the transaction, the bank has provided approximately $500 million in loans with delayed draws to various public finance clients as it looks for ways to creatively meet client borrowing needs.
"It's something we are actively in dialogue" on with other large issuers, he added. The bank has completed similar transactions with two other states.
