Wisconsin turns to taxables for advance refunding

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Wisconsin is ready to jump into the market with a $285 million advance refunding of general obligation debt that will mark its first major taxable GO issue since it tapped into the federal government’s Build America Bond subsidy program.

Both the low rates available in the taxable market along with a flattened yield curve that doesn’t cut too deeply into savings when establishing the escrow to pay off the previously issued bonds make it an opportune time to use the taxable structure. The state anticipates at least 10% net present value savings.

“If we could do this on a tax-exempt basis we would,” but that’s not option since the federal government eliminated advance refundings with the 2017 tax bill, said state capital finance director Dave Erdman.

“Taxable rates are low enough for us to move forward,” he said. “We’ve been looking at this for a while and decided it was the right time to do a transaction of a moderate size.”

Erdman said a side benefit of using the taxable structure is the additional diversity it brings to the state’s pool of investors. The deal will tap $495 million of GO refunding authority previously authorized by the state building commission. Erdman said he may ask the commission at its Oct. 16 meeting for additional authority in order to move quickly if additional refunding candidates are identified.

The underwriting team is ready to bring the deal as soon as Monday, Erdman said.

Goldman Sachs is the book-running senior manager and Loop Capital Markets is the co-senior. Another five firms round out the team. Foley & Lardner LLP is bond counsel and Lamont Financial Services Corp. is advising the state. The bonds mature through 2034 and feature a make-whole call provision typical in the corporate market.

The state asked Kroll Bond Rating Agency and Moody’s Investors Service and S&P Global Ratings to rate the deal. Kroll affirmed its AA-plus rating and positive outlook and Moody’s affirmed its Aa1 rating and stable outlook. S&P has not yet released a new report but it affirmed the state’s AA and stable outlook in July ahead of a new money GO issue.

“The state's Aa1 general obligation rating reflects a well-funded pension system and limited OPEB liability, moderate but steady economic growth, conservatively managed budgets and adequate liquidity. The rating also reflects the state's low fixed costs despite Wisconsin's slightly elevated debt levels, which outweigh the credit challenge of the state's negative unassigned fund balances,” Moody's wrote.

“The 'AA' rating on Wisconsin's GO bonds and notes reflects our view of the state's governmental framework supportive of credit quality, demonstrated ability to make midyear budget corrections; and well-funded pension system and only an implicit unfunded other postemployment benefit (OPEB) liability," S&P analyst Carol Spain said in the July report.

“We believe the fully funded pension system offsets the state's credit weaknesses, which include a slow-growing economy, a trend of just adequate reserve levels, and a moderately high debt burden,” Spain added.

Kroll revised its outlook to positive over the summer. “The positive outlook reflects the state’s continued fiscal discipline and the resulting improvement in its financial reserves. KBRA expects that state management will continue to act during the fiscal year to maintain budget balance as needed,” Kroll wrote.

The new state budget dips deeply into the state’s ending balance leaving it at $114 million at the close of the budget cycle, down from a current level of $948 million. On the plus side, the state expects to deposit $291 million into the rainy day fund bringing it up to a record $617 million due to a strong fiscal 2019.

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Primary bond market Taxable bonds Refunding bonds State and local finance State of Wisconsin Wisconsin