CHICAGO - Wisconsin, the issuer that introduced extendible municipal commercial paper to the tax-exempt market last year, is expanding the use of this new municipal security in its debt program with plans to sell a portion of its impending transportation revenue issue in EMCP form.
State capital finance director Frank Hoadley said his office is also weighing the conversion of a portion or all of Wisconsin's $140 million of outstanding commercial paper issued under its transportation revenue program to the new form.
The extendible notes are similar to traditional commercial paper, but the state retains the right in the event of a failed remarketing to extend the maturity, which eliminates the need for a liquidity facility. The original term plus the extension period won't exceed 270 days.
And in another twist for its EMCP program, the state will use two broker-dealers to serve as remarketing agents that have participated in past transportation commercial paper transactions, but not in any of the state's previous EMCP deals. Lehman Brothers and Bear, Stearns & Co. will likely serve as remarketing agents.
Goldman, Sachs & Co. first brought the EMCP concept to Hoadley and served as the remarketing agent on the first couple of transactions. Merrill Lynch & Co. was later brought in as an agent on the state's extendible note deal in the spring.
The state will launch its new transportation issue with the sale of $124 million of fixed-rate revenue bonds on Sept. 12 and follow it up in the next six months with the sale of another $76 million of extendible notes. That note figure could go higher should the state decide to convert a portion of its more traditional commercial paper. The debt will pay for major state transportation projects.
Despite the state's familiarity with the EMCP form, the upcoming transaction presented new challenges to Hoadley's staff. The state's high credit ranking -- at AA-plus for its general obligation debt -- is a key to marketing the unenhanced paper, and that's typically an easier task when the state's general obligation pledge is involved. The state's first two EMCP deals were sold as GOs.
The first revenue backed EMCP deal was sold earlier this year under the state's new environmental underground petroleum storage cleanup program. Ensuring top credit ratings on revenue bonds was more challenging than on the GO debt, but the newness of the program provided the state with more structuring flexibility because it was able to write the program's governing resolutions to strengthen the EMCP issue.
The state was able, under the environmental program, to put interest payments on EMCP debt on a parity basis with the fixed-rate issuance. That won't be possible with the upcoming transportation issue, whose existing resolution puts all commercial paper on a subordinated level to the fixed-rate. The same guidelines will apply to the extendible notes, Hoadley said.
Still a relatively new form of debt for many investors, the paper has typically paid five to seven basis points higher than standard commercial paper because of the perception of an increased risk. But Hoadley believes the slightly higher rate is well worth it to the state.
On the administrative side, Hoadley said much time is spared by not having to maintain a liquidity agreement, and he likes that the state is not subject to outside credit factors.
"The reality is that you wind up being exposed to the credit risk of the liquidity facility," Hoadley said. "It's more than just management for us."
One example of such exposure recently occurred when Fitch downgraded the credit on Commerzbank's long- and short-term ratings. The bank covers about 50% of the state's outstanding GO commercial paper.
Wisconsin was one of just a few issuers that Fitch did not downgrade in conjunction with their action on the bank. Although the downgrade has yet to affect the highest credit marks carried by Wisconsin's CP, it's still cause for concern, according to Hoadley.
"The EMCP at this time is not for all issuers. You have to be a large and frequent issuer with a strong enough underlying credit, and you have to have debt management that is comfortable to the rating agencies and investors," Hoadley said. "It is working for us and we think there are other issuers out there who have done it or will do it."
Several issuers, including Shelby County, Tenn., and the Orlando Public Utilities District, have sold or are considering using the security.
The upcoming competitive transaction will be structured much like the state's recent GO sale, a mix of fixed-rate and extendible paper in which the notes are paid off first to keep the state's long term exposure to market fluctuations to a minimum. The fixed-rate will carry maturities from 2011 to 2020. The structure also allows the state to pay off at any time the variable-rate paper in the first 10 years. This is not possible for the fixed-rate debt, which typically has a 10-year call feature.
To ensure the strongest possible ratings needed to market the unenhanced notes, the state anticipates it will apply the same takeout test that is has applied monthly to past EMCP issues. It's a variation of the additional bond test to protect the debt's creditworthiness from interest rate volatility.
Issuers typically only test the strength of coverage levels when new debt is first issued. In the event of a failed test, the state would be required to pay off a portion of the variable-rate debt or convert it to fixed-rate to maintain a two times coverage ratio.
