Record Booze Profits Bolster Ohio Job-Bond Offer: Muni CreditMark Niquette
Ohio’s record liquor profits are set to increase demand for $1.5 billion of bonds to fund the private entity Governor John Kasich created to spur job growth, even as unresolved litigation hangs over the deal.
JobsOhio plans to sell the combination of taxable and tax-exempt debt as soon as next week in the largest municipal offer by Ohio issuers since 2007, data compiled by Bloomberg show. The bonds will be backed by liquor profits, which reached an all-time high of about $251 million in fiscal 2012, according to the Ohio Office of Budget and Management.
The deal, which involves transferring the state’s wholesale liquor distribution system to JobsOhio for 25 years, had been delayed by legal challenges. The revenue paying the bonds will attract investors, even though some may demand extra yield to compensate for the litigation, said Alan Schankel, head of fixed-income research at financial services firm Janney Montgomery Scott LLC.
“One thing that I don’t see falling away is liquor consumption,” Schankel said from Philadelphia. Investor interest will be “pretty significant,” he said.
$100 Million Yearly
Kasich, 60, a Republican who took office in 2011, recommended JobsOhio and the transfer of liquor profits to fund economic development. The nonprofit started up that year after the legislature approved the plan.
The goal is to complete deals more quickly and creatively to give Ohio an edge over states such as Michigan and Indiana in competing for jobs. Kasich’s administration expects about $100 million will be available yearly, more than development entities such as the Michigan Economic Development Corp. have to spend.
Two Democratic lawmakers and ProgressOhio, a Columbus nonprofit group, challenged JobsOhio in court, saying it violates the state constitution by funneling public dollars to a private entity.
Their complaint was dismissed by a Franklin County judge in December 2011 on the grounds that they didn’t have the right to sue. An appeals court upheld the decision in June. The parties appealed the standing ruling in July to the Ohio Supreme Court, which has yet to act.
The lingering legal challenge is crimping the debt’s credit standing. Standard & Poor’s Ratings Services assigned an AA rating, its third-highest. Yet Moody’s Investors Service issued an A2 grade, sixth-highest.
The debt would have been rated more along the lines of other Ohio bonds backed by liquor profits, two or three levels higher, without the legal risk, said Ted Hampton, a New York-based analyst at Moody’s.
Ohio sold taxable Build America Bonds in 2009 with a similar backing of liquor profits and an Aa2 Moody’s rating, three steps higher than next week’s offer. Securities maturing in October 2024 traded Jan. 16 with an average yield of 3.43 percent, or about 1.5 percentage points above benchmark Treasuries, data compiled by Bloomberg show.
Without a court resolution, investors may be wary about the new debt, said Howard Cure, director of muni research in New York for Evercore Wealth Management, which oversees about $3.8 billion.
“Unless it’s something particularly attractive -- and my sense is it won’t be -- I’m not sure it’s worth the risk of buying it before the litigation is resolved,” Cure said.
Citigroup Inc. and JPMorgan Chase & Co., lead underwriters on the deal, are holding investor meetings in U.S. cities and in London to market it, according to an invitation.
Elizabeth Seymour, a JPMorgan spokeswoman, and Scott Helfman, a spokesman for Citigroup, both declined to comment.
About $1.1 billion of the sale will be federally taxable, data compiled by Bloomberg show.
The sale may benefit from international demand, given that investors outside the country are increasingly comfortable with U.S. munis following the introduction of taxable Build America Bonds, Schankel said.
In Ohio, there are no government-run liquor stores, though the state buys and distributes alcohol to retailers.
JobsOhio has agreed to pay the state $500 million for the transfer of profits, while using about $850 million to retire debt backed by the liquor money and $225 million for uses such as economic revitalization and working capital, said John Minor, the group’s president in Columbus.
Brian Rothenberg, executive director of ProgressOhio, said in a telephone interview it is “absurd” for JobsOhio to sell the securities without having the legal issues settled.
“There’s clearly a question on whether this is constitutional,” he said.
Kasich said it’s “critical” that JobsOhio expand and take better advantage of development opportunities. He also downplayed the risk of the litigation.
“I don’t want to hold things up on the basis of what might happen in another court hearing,” he told reporters in Columbus Jan. 9. “Any time you do any bonding there are risks involved, whether it’s a company, a local community or JobsOhio. The ratings take that into account.”
Kasich’s administration filed a complaint Aug. 10 in the Ohio Supreme Court seeking to clarify the legality of JobsOhio. The court dismissed the case, saying it didn’t have jurisdiction.
Ohio’s economy is rebounding after losing more than 550,000 jobs from 2000 to 2010, according to federal data. The state’s jobless rate was 6.8 percent in November, compared with 7.8 percent nationally. Michigan, Illinois and Indiana had rates of 8 percent or above.
The largest bond sale by Ohio issuers was about $5.5 billion in tax-exempt securities in 2007 by the Buckeye Tobacco Settlement Financing Authority, according to the budget office.
In the $3.7 trillion muni-bond market yesterday, yields on 10-year benchmark munis rose from a one-month low, by 0.01 percentage point to 1.7 percent, data compiled by Bloomberg show.
The pending case is ProgressOhio.org Inc. v. JobsOhio, 2012-Ohio-1272, Supreme Court of Ohio.
Following is a pending sale:
NEW JERSEY ECONOMIC DEVELOPMENT AUTHORITY plans to issue $2.2 billion of school construction bonds and notes as soon as next week, according to Moody’s Investors Service. Proceeds will go toward refunding debt, which will reduce variable-rate securities and terminate swap agreements. (Added Jan. 17)