The Wisconsin Center District will sell $434 million of bonds this week to finance the expansion of Milwaukee’s convention center.
Backers say the project will provide an economic jolt to counter the COVID-19 pandemic’s blows in the near term and help the facility better compete over the long term.
Wisconsin Center District
The district is tentatively targeting Wednesday for the pricing.
It will offer the bonds in two tranches: a $143.7 million series of senior dedicated tax revenue bonds and a $300 million junior lien series that will carry the state’s moral obligation pledge. State lawmakers previously approved use of the pledge on up to $300 million for the project and the state’s capital finance office has worked with the district on the deal.
The debt is structured as capital appreciation bonds and will go out 40 years to 2060, with some breathing room in the early years because principal repayment does not begin until 2027. Assured Guaranty Corp. will wrap the deal.
“We believe the offering of 40-year, rated/insured CABs, being both federal and state of Wisconsin exempt, will be an attractive opportunity for investors,” Steve Marsh, the district’s chief financial officer, and financial advisor John Mehan, a managing director at Baird, said in a statement.
Financial documents have estimated the savings of using the state backing at about $50 million.
The structuring of the debt repayment takes into account the restricted revenues and the projected tax collections over the life of the bond issues. The use of bond insurance was driven by the market’s favorable view during marketing and the cost effectiveness of using a surety bond for the debt service reserve fund, officials said.
St. Louis recently issued debt backed by an appropriation for a convention center expansion and Indianapolis is moving forward with its own expansion project. The public agency that manages Chicago’s convention center over the summer restructured debt to avoid dipping into a state sales backup and a convention center refunding for Columbus’ facility also eased near-term pressures as the industry remains strangled by bans on large gatherings.
The WDC’s board approved the expansion in April with the governance committee giving the financing a final review earlier this month.
The April approval came after a debate with some board members voicing their concern about proceeding with the expansion amid the standstill in trade and convention business, uncertainty over when it would resume given the pandemic’s course and dependence on a vaccine and treatments, and the blows suffered to economically sensitive taxes that repay the debt.
A debt restructuring in June laid the groundwork for the new money deal. That taxable deal for about $82 million carried bond insurance and a state backup pledge on a portion. The sale landed at spreads of 270 basis points to 300 basis points to Treasuries — a high cost but acceptable given it was a convention-related credit, market participants said.
The district opted to go with insurance from Assured on the entire June deal based on investor sentiments. The transaction trimmed near-term debt service payments to $8.2 million from $25.1 million in fiscal 2020 with capitalized interest easing payments owed in fiscal 2021 and 2022.
Without the restructuring, the district risked triggering a state moral obligation pledge on a portion of the district’s debt which would require the state to replenish reserves.
The district expects to close the books on fiscal 2020 with a $2.7 million loss compared to an at least $20 million positive gain expected in part because of the the 2020 Democratic National Convention, which did not take place in person because of the coronavirus. The district has trimmed personnel and capital spending to manage.
The finance team decided to move forward with the new money based on market conditions including rates and investor demand and the thinking that now is the time to get going on the project.
“The lead time needed for planning and constructing the expansion was the primary driver. The expectation is that there will be a return to convention business by 2023” and so “opening an expanded Wisconsin Center in Q1 2024 will position Milwaukee to ride the wave of meeting and convention business,” Marsh and Mehan said. “Funding the expansion project now will enable the WCD to keep on track with the desired schedule.”
The bonds carry underlying ratings of A3 and negative outlook on the senior lien and A1 and negative outlook on the junior lien from Moody’s Investors Service.
The A1 is notched of the state’s Aa1 rating based on its support and “less essential nature” the project and the state’s stable outlook.
Moody’s cut the senior lien one notch to A3 ahead of the spring restructuring. “The negative outlook reflects the district’s sole dependence on economically sensitive revenues for debt service which have weakened considerably as a result of the coronavirus pandemic. The outlook also considers our expectation that these revenues will remain pressured over the next two years,” Moody’s said in the new report.
After the sale, the district will have $223.2 million in outstanding senior lien and $473.4 million in junior lien special tax debt.
S&P Global Ratings assigned an underlying BBB rating and negative outlook to the senior lien and A-plus rating and stable outlook on the junior lien with the state’s moral obligation backing. S&P cut the district’s standalone rating by three rungs from A and assigned a negative outlook ahead of the spring restructuring.
The district’s stand-alone bonds are secured by revenues generated by a 2.5% Basic Room Tax, a 0.5% Local Food and Beverage Tax, and a 3% Local Rental Car Tax, all of which are levied across Milwaukee County and can only be used for debt service. The bonds are additionally secured by a 7% Additional Room Tax levied in Milwaukee which is pledged first to debt service and then any lawful purpose. The taxes generated $38.6 million in 2019.
Morgan Stanley and BoA Securities are lead managers with Morgan Stanley running the books. Quarles & Brady LLP is bond counsel.
The expansion will double the square footage of the convention center and provide a facelift for the existing downtown space. The district estimates it would generate $12.6 billion in spending over 30 years and allow the city to remain competitive with venues in other major cities. The district’s facilities include the convention center, now known as the Wisconsin Center, the University of Wisconsin-Milwaukee Panther Arena, Miller High Life Theatre, and the Fiserv Forum.