Wisconsin's forward delivery bonds stand out in Midwest

When Wisconsin priced $253.755 million of general obligation refunding bonds for forward delivery on July 23, it was the state's second forward delivery deal in recent months.

On Feb. 27, Wisconsin had priced $89.02 million of GO refunding bonds, 2025 Series 1, for forward delivery. The state taxable and federally tax-exempt bonds, to be delivered Feb. 4, 2025, are being issued for the current refunding on May 1, 2025 of outstanding GO bonds, according to the posted on the Municipal Securities Rulemaking Board's EMMA website.

The proceeds of the 2025 Series 2 bonds, priced in a negotiated sale for delivery Feb. 4, 2025, went to the bond security and redemption fund for the current refunding on May 1, 2025 of general obligation bonds previously issued by the state, according to the official statement for those bonds.

Forward delivery bonds have an extended settlement date ? which lets issuers lock in rates at pricing for a closing date in the future ? but are otherwise comparable to a typical refunding transaction.

Wisconsin is in a relatively small club of Midwest issuers who have turned to forward delivery deals this year. Out of 1,653 deals in the region during the year to date, just five were listed as forward delivery deals, according to data from LSEG.

Illinois' Glen Ellyn Park District in February sold $1.36 million of non-referendum Series 2024A GO limited tax park bonds for delivery on Oct. 30.

Hamilton County, Ohio, priced $66,440,000 of 2024 Series B sewer system refunding revenue bonds on May 7 for delivery on Sept. 4.

The University of Cincinnati priced $26,700,000 of Series 2024D general receipts refunding bonds on May 29 for delivery on Sept. 4.

And then there were Wisconsin's two forward delivery deals. For the 2025 Series 1 deal, the municipal advisor was Public Resources Advisory Group. The lead underwriter was BofA Securities. Bond counsel was Foley & Lardner LLP.

On the 2025 Series 2 deal, the municipal advisor was PFM Financial Advisors. Goldman Sachs (GS) was the lead underwriter, and bond counsel was Foley & Lardner LLP.

The state had $6.6 billion in aggregate principal of total general obligation debt outstanding as of July 1. The issuance of the bonds will not cause Wisconsin to surpass its annual debt limit or its cumulative debt limit of $42.1 billion, according to the July official statement.

The forward delivery deals served to lower debt service on previously issued GO bonds.

"We locked in savings for bonds that have a call date of [May 1, 2025] and eliminated interest rate risk between now and the current refunding window," Wisconsin Capital Finance Director Aaron Heintz said. "For the bonds that are being refunded by both series of forward delivery bonds, the refunding candidates generally met our savings metrics."

Those metrics included present value savings of at least 3%, using a scale for a 10-year par call structure; an OCI [other comprehensive income] factor equal to or less than 50%; and negative arbitrage considerations including, but not limited to, efficiency and first optional redemption date of the bond, Heintz said.

They also removed any impacts of the election outcome from the equation, Heintz said.

Several of the candidates included in the 2025 Series 1 deal were also included in the invitation to tender funded by the 2024 Series 1 transaction "as an incentive for current holders of those bonds to seriously consider the tender and then take the proceeds from the tender and reinvest the funds at current rates as opposed to waiting until [May 1, 2025] to reinvest those funds," he said.

"Of the bonds with a [May 1, 2025] call date that weren't tendered, we did include several of those candidates in the 2025 Series 1 transaction that achieved around at least 75% of the savings of what they would be when compared to a hypothetical current refunding," he added.

For the 2025 Series 2 deal, most candidates had break-evens of 25bps or less compared to a hypothetical current refunding, Heintz said, and for most of them, the present value savings were generally above 85% of what they would be compared to a hypothetical current refunding.

"The bulk of the bonds had 2026 through and including 2029 maturities, so they weren't going to have significant present value savings because there isn't a lot of time for the savings to accumulate," Heintz noted.

In 2021, forward delivery bonds hit a record for issuance, with issuers turning to those types of deals as a replacement for the tax-exempt advance refundings that were eliminated in the Tax Cuts and Jobs Act signed by then-President Trump in 2017.

Earlier this year, the New Jersey Turnpike priced $684 million of forward delivery bonds. Such deals seem to be more popular in the Northeast this year, with New Jersey alone seeing two forward delivery deals in as many months.

But expectations of lower interest rates going forward may temper issuers' motivations for forward delivery deals.

Heintz acknowledged that with forward delivery deals, if rates or yields are lower when you get to the current refunding window, you wind up leaving additional savings on the table.

But he said they can be worth it under circumstances like those for the 2025 Series 1 and 2 bonds.

"They take interest rate risk off the table," he said. "The bulk of the candidates included in the 2025 Series 2 transaction weren't going to generate significant savings because of the time between the [May 1, 2025] call date and their stated maturities."

With many people expecting short-term rates to go down sometime this year and the yield curve to normalize, forward delivery transactions aren't booming the way they were in 2021, he said, but "there are many investors who will look to forward delivery transactions to obtain some incremental yield over non-forward delivery transactions.

"If the refunding candidates under a forward delivery scenario meet your savings criteria and depending on your tolerance for interest rate risk, I would seriously look at executing the transactions and lock in savings," he said.

In Wisconsin, both forward delivery deals received AAA ratings from Kroll Bond Rating Agency, Aa1 from Moody's Ratings and AA-plus from S&P Global Ratings, keeping the state's ratings steady.

KBRA praised the state's financial performance and reserve position but noted in its rating report that the state's general fund net balance was projected to be $3.2 billion at the end of fiscal 2025, $439.1 million below an earlier estimate, driven mainly by a decrease in tax collections.

Douglas Kilcommons, managing director in KBRA's Public Finance Ratings group, said tax collections for both fiscal 2024 and 2025 came in below estimates primarily because of lower projected individual income taxes and corporate income and franchise taxes.

"Lower marginal tax rates for the state's bottom two tax brackets, enacted as part of Act 19, and higher refunds as a result of withholding tables not being indexed to inflation, are driving the lower individual income tax collections," he said. "Materially lower, year-to-date corporate estimated payments and partnership pass-through entity payments, along with federal tax law changes, are driving the downward revision in [estimated] corporate income/franchise tax collections."

Still, he pointed to the state's "very strong credit fundamentals" and said the factors contributing to its highest long-term rating level are unlikely to change.

Moody's noted Wisconsin's "healthy" fund balance and liquidity as well as the state's low leverage and fixed costs, conservatively managed budgets and large economy. Wisconsin's real gross domestic product growth lags the country's and it relies heavily on the manufacturing sector, but the rating agency said it expects the state to maintain its solid reserves and low leverage.

"The Aa1 rating on the general obligation bonds is the same as the state's Aa1 issuer rating given the state's pledge of its full faith, credit and taxing power and broad revenue base to pay the bonds," Moody's said in its rating report.

The bonds are secured equally with all other outstanding GO debt issued by the state. Wisconsin law creates as security for the payment of debt service on general obligations a first charge upon all revenues of the state. Wisconsin also irrevocably appropriates "a sufficient amount of those revenues" for the payment of principal and interest on GO debt, so no further legislative action is required.

S&P cited in its rating report "robust" financial performance and "very strong" combined reserve balances and liquidity positions, as well as an expectation that Wisconsin will manage its budget "proactively."

"We view Wisconsin's well-funded pension system and relatively low exposure to other postemployment benefits costs as key factors underpinning its long-term credit stability," S&P Global Ratings credit analyst Thomas Zemetis said in a statement.