Ohio tees up trio of deals with mix that hits variety of buyer tastes
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Investors will have a range of state of Ohio-related credits with a mix of taxables, tax-exempts and sustainability-labeled bonds to choose from over the next two weeks with three separate deals hitting the market.
A $617 million taxable JobsOhio transaction is first up Tuesday.
The state established JobsOhio in 2011 as a privatized not-for-profit economic arm and in 2013 transferred its liquor enterprise system under a 25-year lease to JobsOhio Beverage System. The system issued an inaugural $1.5 billion deal in 2013 with much of the proceeds going to the state in exchange for the lease and to pay off existing liquor debt and fund projects.
The state holds a monopoly on the distribution and sale of all liquors with at least 21% alcohol under a model that began after Prohibition ended.
The senior-lien liquor profits revenue bonds will sell in two series —$308 million of index-eligible bonds maturing in 2032 and $309 million maturing in 2038. Citigroup Global Markets and Loop Capital Markets LLC are senior managers.
“We feel that the issuance of these bonds is a great opportunity to participate in a resilient high-quality credit,” JobsOhio Chief Financial Officer Brian Faust said in a recorded investor presentation. “The revenue and profit backing that credit is derived from a monopoly.”
Since 2013, the system has nearly doubled operating revenues to $1.73 billion in 2022 from $869 million, which in turn has driven up debt service coverage ratios. A three times ratio will remain intact even after the borrowing.
“The liquor enterprise in Ohio has historically grown at a rate of 3% or more year-over-year and has proven to be resilient to economic and other challenges such as 9/11, the dot-com crash and the Great Recession,” said Julie Battles, JobsOhio senior managing director for finance and administration.
Ahead of the deal, Moody’s Investors Service affirmed the program’s Aa3 rating and stable outlook and S&P Global Ratings affirmed the program’s AA-plus rating and stable outlook. JobsOhio has about $1.17 billion of existing debt from issues in 2013 and 2020.
“The rating reflects our expectation that continued liquor profit growth will support growing debt service coverage that over the medium term is maintained at or above 3 times,” said S&P analyst Rob Marker.
The bonds enjoy a first lien on state liquor enterprise profits which come from the sale of spirits. The program pays suppliers directly for spirituous liquor, excluding a $3.38 per gallon tax that is paid to the state treasurer for credit to the general revenue fund. Historic growth in pledged liquor profits has remained strong and resilient through economic cycles, providing $480.6 million in pledged liquor profits for 4.88 times coverage.
Proceeds from the sale will finance approved JobsOhio projects and other economic development efforts. Since 2017, the program has funded 1,500 projects that meet specific criteria. A multi-layered review process contains a clawback mechanism if metrics aren’t reached.
The program has 481 active projects. Recent awards include big-profile projects, like an Intel semiconductor manufacturing plant and Ford and Honda electric production and battery production projects.
“The stable outlook reflects the expectation that liquor enterprise profits will continue to provide satisfactory debt service coverage despite the large new borrowing and recent rapid growth in operating expenses,” Moody’s said.
On Wednesday, state Treasurer Robert Sprague’s office will price $112 million of state infrastructure project revenue bonds, also known as federal grant anticipation revenue vehicle or GARVEE debt. Goldman Sachs is senior manager.
Ahead of the sale, S&P affirmed the program’s AA rating and stable outlook. “The rating reflects our view of very strong maximum annual debt service coverage based on historical federal grant receipts and good bond provisions that remain consistent with peers,” said S&P analyst Thomas Zemetis.
Moody’s affirmed the program’s Aa2 rating and positive outlook on the deal and $765 million of outstanding debt as the bonds benefit from a state link. Moody’s moved the state’s outlook on its Aa1 general obligation rating to positive last month.
“The positive outlook is based on growing evidence of new economic development that could diversify the state’s economy, improve growth and strengthen demographic trends over the medium term,” Moody’s said. “The outlook also reflects the recent improvement in the state’s financial position and economic prospects, and our expectation that strong reserves, proactive financial management, and low fixed costs that will support budget flexibility during potential economic uncertainty in the next 18-24 months.”
The bonds are secured by a lien on Title 23 Federal Highway Administration reimbursements to the Ohio Department of Transportation for eligible highway construction projects, but the rating benefits the department’s covenanted pledge to appropriate funds to cover debt from other available resources, such as state gasoline tax receipts, which limits some concern over the potential for future federal funding disruptions. Available funds reached $570 million in fiscal 2022.
Next week, the Ohio Water Development Authority will price $125 million of drinking water assistance fund bonds that will carry a “sustainability” label. Loop Capital Markets is senior manager and RBC Capital Markets is co-senior manager. The program serves as the state revolving fund that makes loans to local borrowers for eligible projects.
Kestrel Verifiers provided an independent analysis included in the offering statement that the bonds conform with the International Capital Market Association’s Green Bond Principles and Sustainability Bond Principles financing environmentally “beneficial projects.”
The authority is still awaiting updated reviews from Moody’s and S&P, but previous issuance carried top ratings. The program is receiving a $136 million boost in the first year from the federal infrastructure package signed by President Biden last year.
