Wisconsin counties group weighs an opioid settlement securitization
7 min read
The Wisconsin Counties Association is studying the feasibility of securitizing counties’ share of a $26 billion national settlement with pharmaceutical companies sued for their role in distributing deadly and addictive painkilling drugs.
The counties group is awaiting a legal feasibility review before its members would decide if a tobacco-settlement style securitization makes financial sense for them.
The state and its counties are to receive $400 million from the settlement with the counties’ share at 70%. They are exploring a securitization of up to $167 million if every county were to participate.
Johnson & Johnson and three major pharmaceutical distributors, AmerisourceBergen, Cardinal Health and McKesson, reached terms on the $26 billion settlement last year and the agreements were finalized Feb. 25 with the Wisconsin Department of Justice joining in the announcement. Additional companies have announced settlement accords since then but they are in varying stages.
A successful opioid settlement securitization raises the possibility that the municipal bond market could follow the path created by the 1998 Master Settlement Agreement with tobacco companies to recover costs associated with medical services for smoking-related diseases.
The MSA created a multi-billion dollar sector that, according to one report, grew to represent almost a quarter of the high-yield municipal bond market.
Legal advisors are exploring whether a securitization can pass legal muster, according to the Wisconsin Counties Association. If it does, then financial terms would be laid out for counties to review and county boards will decide if the premium needed to lure buyers is worth getting most of the payments upfront.
“The attorneys still have to work out the logistics and if it [a securitization] can comply with the directives of the court,” said counties association President Mark O’Connell. Terms of the settlement require that a certain amount be spent in the areas like treatment, prevention, and other strategies. “The question is, ‘Will a securitization permit those percentages to be met?'”
The Wisconsin Counties Association became an early participant in the national litigation against top manufacturers and distributors to hold them accountable for making deadly and addictive opioid painkillers easily available, creating a crisis that has strained local government budgets.
The association spearheaded the securitization proposal by polling the 71 of the state’s 72 counties that participated in the opioid settlement.
“Once it appeared we were heading” toward a settlement with actual dollars on the table “we started talking about options” and when it became clear that payments wouldn’t come in a lump sum but over time, “securitization came to mind,” O’Connell said, adding that to his knowledge a Wisconsin deal would mark the first for the opioid settlement.
The association enlisted partners and in the spring one of those partners, PMA Securities LLC which would be municipal advisor for the transaction, laid out the scenarios in a presentation to the counties.
The presentation, which notes that Illinois-based PMA’s “fiduciary duty” is to the local governments, outlines the participants including the Wisconsin-based national conduit Public Finance Authority as bond issuer and Citibank Global Markets — one of the top senior managers of tobacco settlement securitization deals — as underwriter. The counties association is one of the public sponsors of the PFA.
A securitization would allow counties to capture upfront the payment stream that runs through 2038 which can “make a bigger dent” in efforts to combat opioid addiction and mitigate the risk companies don’t honor the agreed future payment stream, O’Connell said.
Counties will have to decide whether those factors are worth the cost of a securitization in a rising interest rate environment that would require a healthy debt service coverage ratio, all cutting into the total amount received.
“It’s not purely a financial consideration. This is also a social issue and counties need resources to address it now,” O’Connell said.
News of the opioid settlement spurred securitization talk in municipal market corners given the obvious parallels with the tobacco settlement. Wisconsin was among the states that securitized tobacco payments. Market participants said the first-time issuance of opioid settlement bonds likely would add to the premium.
The association began exploring options for its members before the settlement was finalized.
The counties pursued state legislation last year in Act 57 that laid out the distribution split between the state and counties, and legal fee coverage. The legislation included a provision allowing counties to securitize their share.
“There’s no magic number” but a deal could likely work if counties accounting for at least $50 million of the settlement participated, O’Connell said.
The counties association said it expects progress to be made on a legal decision during the first quarter of 2023 with updated financial terms then being distributed to counties. O’Connell hopes decisions would be made early in the second quarter.
O’Connell said the PFA has agreed to waive its regular fees should a transaction come to fruition, although market participants note that serving the issuer on the first transaction would give the PFA a competitive edge in future deals in other states.
Wisconsin’s share of the settlement being considered for securitization that comes from “distributor payments” through 2038 totals $326.2 million with local governments receiving 70% or $228.4 million. After legal fees, the counties’ share falls to $182.7 million.
The state and counties are receiving an additional $75 million from the settlement with Johnson & Johnson that is to be distributed through 2031 with the counties receiving $52.5 million which falls to $42 million after legal fees.
“Both the J&J and Distributor payments can be securitized” but because the distributor payment portion goes out longer to 2038 and represents a larger dollar amount — $21 billion compared to J&J’s $5 billion — and comes from lower-rated entities than triple-A-rated J&J “we are focusing on the securitization of the distributor payments,” the PMA presentation says.
Without a securitization, local governments would collect a dollar amount of $166.7 million between 2023 and 2038 which adjusted to present value dollars equates to $131.6 million.
About $16 million to be received this year under the settlement is not included in the securitization comparison.
Under a securitization scenario with proceeds being used immediately, local governments would collect 71% of the nominal amount for a total of $118.4 million with $90.6 million coming from the securitization and $27.8 million in ongoing residual payments, the PMA presentation said. In present value terms the number equates to $112.5 million or 85.5% of value.
If the upfront payments are invested, $134.4 million is received, or 80.7% with $90.6 million from the securitization and $27.8 million in ongoing residual payments. The PV figure is estimated at $110 million, or 84.1%.
Each securitization scenario would involve selling 5/6th of distributor payments and retaining 1/6th for annual payments which represents the $27.8 million figure.
Under the “rough math” laid out in the June presentation, the deal anticipates needing 1.20 times coverage and is based on a 5.50% interest rate based on Treasuries plus a spread although it considers a range from 5% to 6.50%. Rates have increased since then.
PMA lays out arguments for securitization that mimic arguments that led governments across the country to leverage their 1998 national tobacco settlement payments.
Securitizing the payments allows local governments to accelerate spending and transfers much of the risk to investors that the distributor payments ever stop or are cut short. The three distributors are rated Baa2 by Moody’s Investors Service.
The association asked counties to provide an indication of how they were leaning over the summer.
Kenosha County, just over the Illinois border, is among those that have expressed interest in participating, to minimize future risk to the payment stream.
“It isn’t so much about getting the money up front as we don’t have a particular project to finance and are still putting together our plans for how we will use the funds,” said Patricia Merrill, Kenosha County director of finance. “We will evaluate the financials at the time and do our own projections and decide whether it’s worth minimizing the risk.”
The county did consult with its own advisor, Ehlers, to glean whether it would impact its own credit and the answer was no.
Dane County, which includes the state capital Madison, is not interested. “Securitizing doesn’t really make any sense to me,” said Chuck Hicklin, Dane’s chief financial officer. “If we securitize there would be a big discount.”
The county expects to use the annual payments for treatment services and other programs.
“We will scale the services to the stream of payments,” Hicklin said. If the county had a project in mind that required an upfront investment, it would be more affordable to tap the municipal market on its own top-rated credit, Hicklin said.
Several local financial advisors who work with local governments, all asking for anonymity, offered a mixed assessment.
“It’s an individualized situation based on the trade-offs so it’s hard to take a uniform position,” one advisor said, adding that if a deal comes to fruition their clients will engage them to obtain a “second set of eyes.”
Another advisor said given the current rising interest rate environment, they don’t believe the deal’s cost is worth it. If a county is looking to finance a project the more affordable alternative is to issue debt on its own credit and then abate the tax levy for the amount of the annual settlement payment, another advisor said, adding that strongest argument in favor is if a county is truly worried over payment stream risk.
Market participants also caution that securitization doesn’t fully shed future risks; states felt compelled to undertake tobacco restructurings to stave off looming defaults even without their own credit on the line.
