With new money and restructuring issues in the works, Moody’s Investors Service placed the special tax ratings of the Wisconsin Center District on review for a downgrade as efforts to combat the spread of COVID-19 threaten collections.
Moody's placed the district’s A2 senior lien and A3 junior lien ratings on $136 million of debt issued in 1996, 2003, 2013, and 2016 under review for a downgrade with the goal of resolving the analysis in the next few weeks. The district has a total of $376 million of debt, including bonds supported by a state appropriation subject to annual approval.
“Today's action is driven by the likelihood that room tax, food and beverage tax, and rental car tax revenue will suffer an immediate and substantial drop from a coronavirus-induced slowdown,” Moody’s wrote. “The slowdown could cause some tax revenue tied to hospitality and travel-related activity to decline by up to 85% through mid-summer, potentially driving debt service coverage down significantly.”
Moody’s lays out its grim assessment that crosses most municipal sectors by saying “the rapid and widening spread of the coronavirus outbreak, deteriorating, global economic outlook, falling oil prices, and financial market declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. Today's action reflects the impact of the crisis on Wisconsin Center District's special tax bonds.”
The bonds are secured by revenues generated by a 2.5% Basic Room Tax, a 0.5% Local Food and Beverage Tax, and a 3% Local Rental Car Tax, all of which are levied across Milwaukee County and can only be used for debt service. The bonds are additionally secured by a 7% Additional Room Tax levied in Milwaukee which is pledged first to debt service and then any lawful purpose.
The district has warned of the dire impact to its own finances as trade shows and conventions have been canceled or postponed and it could exhaust the funds needed later this year needed to make a debt service transfer, forcing it to dip into reserves. That, in turn, could trigger a state moral obligation pledge on a portion of the district’s debt which would require the state to replenish reserves.
A debt refinancing of up to $150 million would provide some term relief to manage through the revenue hit. Near-term debt service payments would be pushed off and the district would reimburse itself for $15 million.
The restructuring is part of a larger financing plan that includes new money borrowing to finance a $420 million expansion of the city’s convention center that is owned by the WCD. The resolution approved by the board last week in a 12-4 vote with one abstention allows the district’s finance team to craft the new money and restructuring bond sale.
It also raises the county’s hotel tax, extends an existing food and beverage tax known as the “candy bar” tax, and allows the district to enter into a tax agreement with the city.
The new money bond sale, originally targeted for late April, is on hold. A large portion of the new money would sell with junior-lien status and the state moral obligation. The remainder of new money would sell under a senior lien. The taxes generate about $36.9 million annually.
