CHICAGO — Wisconsin heads into the market Monday with $42 million of environmental improvement fund revenue bonds that mark its inaugural outing under a new triple-A rated credit.
Proceeds will provide loans to local governments for qualified projects under the state revolving fund program.
With the sale, the state is phasing out its clean water revenue bond program, although some refundings are expected as the state pays down the $700 million of outstanding debt in the program established in 1991, according to state capital finance director David Erdman and Aaron Heintz, who manages the program financing.
"The program has matured and the federal government has loosened some rules. We have a portfolio of loans that can be used as leverage so that we don't need state dollars to support the program," Erdman said of the state's decision to shift to a new model.
The state subsidy that goes to provide the match needed to capture federal funds will take several years to phase out, but once completed will free up $30 million annually.
Loan recipients should benefit from the new program's higher ratings. Ahead of the sale, Fitch Ratings and Standard & Poor's gave the bonds first-time ratings of AAA. Both assigned a stable outlook.
The existing clean water revenue program carried double-A level ratings that were limited due the heavy participation of the state's general fund in the credit. The state carries double-A ratings from all four rating agencies.
"With a lower cost of capital the state can make loans at lower rates," Erdman said.
Citi is the senior manager, Bank of America Merrill Lynch is co-senior and JPMorgan and Ramirez & Co. Inc. are co-managers. Public Financial Management Inc. is the advisor while Sycamore Advisors also provided initial advisory assistance in establishing the program and Foley & Lardner LLP is bond counsel.
The clean water program has 329 pledged loans outstanding with a loan balance of $1.1 billion that will be pledged to the repayment of the new Environmental Improvement Fund Revenue Bonds. The existing program provided more than $4 billion in loans since its inception, Heintz said.
Standard & Poor's said the top credit marks stem from "an extremely strong enterprise risk profile, given that the state's revolving fund pool has ongoing support from multiple levels of government and was established by statute and an extremely strong financial risk profile."
The Milwaukee Metropolitan Sewerage District is the largest borrower with its loan balance accounting for 36% of the outstanding total direct loan principal. The next nine leading borrowers' loan balances account for another 33% of outstanding total leveraged loan principal.
"The stable outlook reflects our expectation that the program's pledged loan revenues will continue to provide overcollateralization consistent with the extremely strong financial risk score, which is also supported by the program's low level of loan delinquencies and strong policies and procedures," Standard & Poor's said.
"Cash flow modeling demonstrates that the program can continue to pay bond debt service with hypothetical loan defaults of 100% over the first four years and 100% in the middle and last four years of the program's life," Fitch said. "This is in excess of Fitch's 'AAA' liability rating stress hurdle."
Fitch does consider high concentration a negative with the top 10 borrowers representing approximately 69% of the aggregate loan pool but a state aid intercept provision offsets some concerns. In the event a borrower becomes delinquent, the state must intercept that entity's state aid payments which includes revenues paid to cities, villages, and towns, and transportation aid.
The program's loan security is solid with about 50% of loan principal backed by GO pledges, 37% by sewer system revenue pledges, and most of the remaining backed by a combination of GO/utility pledges, Fitch said.
The state will follow up Monday's sale with a competitive issue of transportation revenue bonds on Nov. 17. The program carries existing ratings ranging from double-A to triple-A. The sale marks the state's first new money borrowing for transportation projects since March 2014 although a good chunk of recent GO borrowing was earmarked for transportation.
In other transportation borrowing news, the legislature's Joint Finance Committee recently signed off on $350 million of GO bonding over the next two years for transportation projects. The approval came at the behest of Gov. Scott Walker who warned last month that without the authorization key projects would face delays.
A preliminary authorization for the contingent borrowing was included the fiscal 2016-2017 biennial budget but Joint Finance approval was needed to allow for the issuance. Erdman said the additional bonds would be included in upcoming GO sales as needed. The authorization allows for $200 million to be tapped this year and $150 million in the next fiscal year.
"This contingent bonding will reduce delays for major highway projects, which is important for the economic welfare of the state," Walker said. "More importantly, however, it is vital to ensure the safety of Wisconsin's motorists."
While the Republican governor enjoys GOP majorities in the Legislature, he has butted heads with some leaders over borrowing and transportation spending levels. Senate Republicans on the committee rejected the plan but it passed with the support of House Republicans and Democrats.
