Latest Wisconsin offering reaps benefits of tender trend

Wisconsin’s latest tender invitation to $1.8 billion of tax-exempt and taxable general obligation bond holders drew enough interest that the state dropped a planned forward refunding from its $500 million refunding transaction that priced Thursday.

The state launched the tender offer to various tax-exempt series from 2015 through 2021 and taxables from some 2019 to 2021 series on April 11th in conjunction with its borrowing plans. It expired Tuesday with more holders seeking to tender their bonds than the state had authority to refund.

“We only have $500 million of refunding authority available and with tender participation exceeding that amount, we had to reject tenders that exceeded that amount and also forego the forward delivery for the time being,” Aaron Heintz, the state’s capital finance director, said in an email.

Morgan Stanley and Loop Capital Markets LLC served as the dealer managers on the tender and are senior managers on the financing. PFM Financial Advisors LLC advised the state and Foley & Lardner LLP was bond counsel. Globic Advisors served as tender agent.

Heintz attributed the tender’s strong performance to the team’s prompt circulation of the documents, identifying appropriate tender premiums “that got bondholders to seriously consider tendering their bonds given the current market,” direct market outreach to current holders as well as “bit of luck.”

The state invited holders of $1.8 billion to tender their bonds, with $855 million or 47.3% of par amount tendered. The state accepted $547 million with the overall savings still be determined but the present value on the accepted bonds meets the state’s savings threshold, Heintz said.

The state used tenders in two prior transactions — a transportation revenue bond issue in March and a GO issue in October.

The state invited holders of $707 million of transportation revenue bonds to tender their bonds in March, with $249 million tendered for a 35% rate and the state accepted $228 million achieving $18.5 million of savings or 9.9 % of refunding par.

On the GO issue, the state extended the invitation to tender to holders of $534 million, with $203 million tendered, a 38% participation rate, and the state accepted $194 million achieving $9.1 million of savings or 10.6% of the refunding par.

“Tenders are another tool in the toolbox, that depending on the situation and market dynamics, can be used to generate robust savings,” Heintz said. “In addition, the current interest rate environment allows for tender transactions to generate savings well in excess of those that could be realized with a taxable advance refunding transaction.”

Issuers turned to taxable refunding structures to advance refund bonds after that option was eliminated by the 2017 Tax Cuts and Jobs Act, or TCJA. While legislation that would restore advance refundings has failed to reach the finish line over the past four years, it’s back on the table as a standalone bill titled the Investing in Our Communities Act has just been introduced in the House.

The non-distressed tender trend took hold in 2020 and rose above $4 billion in both 2021 and 2022, Municipal Market Analytics said based on a review of Bloomberg data.

This year is on track to stand out as the largest year for voluntary, non-distressed tender offers so far because of Chicago’s sizable invitation earlier this year, MMA said in a weekly outlook piece published last month.

Chicago saw a 21% participation level in its offer to tender $2.9 billion of higher-yielding GOs, up from 15% in its 2021 tender offer, generating $70 million of net present value savings.

“Issuers achieve a reduction in their capital costs despite current call protections (since the exchange is voluntary) or TCJA rules (since only one tax preferenced bond remains outstanding). Bondholders do have to engage in moderately complicated negotiations, but they also are guaranteed to retain their tax-exempt principal and avoid the challenge of reinvesting dollars in the open market, even if such now accrues interest at a lower rate,” MMA said.

While the recent non-distressed trend has focused mostly on tax-exempts, MMA said market participants report widespread consideration of future tender offers for taxable bonds because of high taxable refinancing rates, in particular Build America Bonds, “where issuers and investors also have an interest in avoiding the unfortunately very realistic risk of direct pay subsidy cuts/elimination in 2024 if House Republicans choose not to waive the terms of the 1990 PAYGO rule,” MMA said.

Nearly all $112 billion of the still-outstanding $121 billion direct pay BABs are currently protected by make-whole call provisions, issuers have few options away from a voluntary tender to restructure their bonds ahead of any hypothetical subsidy lapse, MMA noted.

Ahead of the Wisconsin transaction, rating agencies affirmed the state’s GO ratings. The bonds carry a AAA from Kroll Bond Rating Agency, an Aa1 from Moody’s Investors Service, and a S&P Global Ratings rating of AA-plus. The state has about $7 billion of outstanding GO debt. Fitch Ratings rates the state AA-plus.