Wisconsin's debt plans include defeasance and refunding bonds

The state of Wisconsin is embarking on a flurry of debt-related activity as the year begins, with a cash defeasance and three refunding deals that may include tenders on the table in the first quarter.

The defeasance was made possible by the state's 2023-25 biennial budget, which included $400 million to pay down outstanding general fund annual appropriation bonds related to tobacco settlement revenues. 

In 1998, 46 states plus Washington, D.C. signed a master settlement agreement with the four top tobacco companies: Brown & Williamson, Lorillard, Philip Morris and R.J. Reynolds. The settlement ended the states' litigation against the tobacco giants for the harm they caused to public health. In return, those states were to receive more than $206 billion from the tobacco companies over the next 25 years.

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Many states and local governments issued bonds to securitize the settlement in order to receive money up front, turning tobacco bonds into a distinct sector of the high-yield municipal bond universe.

In 2002, Wisconsin received $1.567 billion in proceeds from its first tobacco securitization bonds in a deal totaling $1.591 billion. In exchange, the state gave the rights to its next three decades of tobacco settlement proceeds to the Badger Tobacco Asset Securitization Corporation, a nonprofit created by its Department of Administration, according to the Wisconsin Legislative Fiscal Bureau. Wisconsin issued serial bonds, fixed amortization bonds and turbo term bonds as part of that deal.

In 2009, Wisconsin refunded its tobacco settlement bonds with a $1.5 million deal backed by state appropriations. That repurchased the rights to future tobacco settlement revenues, while the higher-rated appropriation pledge meant lower interest rates for Wisconsin.

Those bonds are all now known collectively as the 2009 indenture bonds, and they include the bonds that Wisconsin is defeasing this year. All are current interest bonds, according to Wisconsin Capital Finance Director Aaron Heintz.

"We looked at all outstanding 2009 indenture bonds, but the May 1, 2027, maturities of the 2017 Series C and 2023 Series A general fund annual appropriation bonds made the most sense to target, given where we wanted the savings to be," Heintz said of the defeasance. 

He said the state weighed its options regarding defeasing versus trying to get bondholders to tender, "but the defeasance ultimately won out given the certainty that the defeasance provided, along with the escrow yield." Heintz said that yield will allow Wisconsin to defease about $415 million of bonds – all $377.5 million of the 2017 Series C and $37.3 million toward the total of the 2023 Series A.

The defeasance also made sense because the 2017 Series C bonds have a balloon maturity. This way, Heintz said, the state avoids interest rate risk and additional interest rate costs from amortizing the balloon to its original maturity of May 1, 2033.

Meanwhile, $46.5 million of 2024 Series 1 transportation revenue refunding bonds are financing the buying back of outstanding bonds that weren't tendered as part of Wisconsin's 2023 Series 1 deal. That forward delivery transaction was priced on March 14, 2023, and is scheduled to close this April 2. 

The bonds have a first claim on vehicle fees, which comprise a substantial share of pledged program income, according to the preliminary official statement. Wisconsin brought in $924.1 million in vehicle registration and other transportation-related fees in 2023, and expects that number to climb steadily over the next decade. 

Heintz said the bonds will generate $4.2 million of present value savings or 9.7% of refunded par. The state is still determining exactly how much in debt service savings the 2024 Series 2 transportation revenue refunding bonds are likely to generate.

"We are looking at tax-exempt candidates that each generate at least 7% PV savings and taxable candidates that are generating positive PV savings," he said of those bonds as well as the general obligation refunding bonds. "In addition, both refunding transactions may utilize a tender."

The senior manager of the 2024 Series 1 transportation revenue refunding deal is Citigroup, with Cabrera Capital Markets as co-senior manager. The municipal advisor is Public Resources Advisory Group. Bond counsel is Quarles & Brady LLP. The senior manager for the 2024 Series 2 bonds is Wells Fargo, with Loop Capital Markets as co-senior manager. The municipal advisor is Baker Tilly Municipal Advisors, and bond counsel is Quarles & Brady.

Fitch Ratings assigned its AA-plus rating to the bonds, outlook stable. In its rating action, the agency pointed to robust revenues for debt service coverage and a strong revenue-raising track record.

Kroll Bond Rating Agency assigned its AAA rating to the bonds, outlook stable. It cited "consistently strong coverage" of maximum annual debt service on the state's $1.6 billion of outstanding transportation revenue bonds (as of February 2023),  and stable revenues supported by the consistency of vehicle registration fee proceeds. 

S&P Global Ratings assigned its AAA rating to the bonds, outlook stable. It noted that the transportation revenue bonds "are eligible to be rated above the sovereign, because we believe the bonds can maintain better credit characteristics than the U.S. in a stress scenario," the rating report noted.

"The AAA rating reflects both the stable outlook on Wisconsin, and our view of historically steady growth in pledged program revenues, supported by Wisconsin's substantial statewide population and economic base on which the vehicle fees are levied, that are likely to provide continuing very strong debt service coverage," said S&P credit analyst Thomas Zemetis. 

"For the pending 2024 Series 2 [transportation revenue bonds], we haven't reached out to the rating agencies yet but expect to do so in February," said Heintz.

The general obligation 2024 Series 1 and 2025 Series 1 refunding bonds will also finance the purchase of outstanding bonds. The deal is a negotiated sale, and the pricing date for the bonds will likely be early in the week of Feb. 26.

The invitation to tender will go out the week of Feb. 5, and the tender offer expires the week of Feb. 19. 

The senior manager of the general obligation refunding deal is BofA Securities; Ramirez & Co. is co-senior manager. The municipal advisor is Public Resources Advisory Group. Bond counsel is Foley & Lardner LLP.

February will be a busy month for Wisconsin, Heintz said, as it will also include competitive sales of more general obligation bonds and environmental improvement fund revenue bonds early in the month. Both of those deals are new money transactions.