In what could be one of the largest mixes of taxable and tax-exempt bond deals of its kind, Ohio officials are moving forward with a roughly $1.5 billion offering that will be secured with profits from the sale of liquor.
The deal has been mired in controversy since it was concocted years ago. However, one thing that potential bond buyers may not have to worry about is the bonds going into default. This week, the state’s liquor control division announced that state liquor sales set a record last year. Given the rate of consumption of liquor in the Buckeye State, I believe there is little reason to think that the strong sale of beverages containing it (or on the rock pours) in the state won’t continue in future years, providing a more than adequate revenue stream to back the bonds.
Deal’s Structure
Scheduled to price through a negotiated sale on Jan. 23, the bonds will be sold in two series. Roughly $423 million will be sold as Series 2013A tax-exempt, senior lien revenue bonds. The remaining $1.1 billion will also be senior lien revenue bonds, but they will be taxable. JP Morgan and Citigroup are joint senior bookrunners for the deal.
The 2013A bonds have serials maturing in principal amounts of $5,000 between 2015 and 2023. Most of the deal entails one term bond in the amount of about $378 million that matures in 2038. The 2013B bonds also have serials maturing between 2015 and 2023. There are two term bonds that mature in 2029 and 2035, in the amounts of about $356 million and $382 million, respectively.
Only Moody’s Investors Service and Standard & Poor’s rated the deal. Moody’s rating is A2 and Standard & Poor’s rating is AA.
Controversy
The major difference between the ratings of the two agencies is the outlook assigned. Standard & Poor’s outlook is stable, but Moody’s outlook is developing, which brings me to the controversy that nearly derailed the deal.
In rating the deal, Moody’s noted that it was watching to see the final outcome of litigation challenging the legality of the JobsOhio Beverage System, which is the private nonprofit created to issue the bonds. Observers say that a pending ruling by the state Supreme Court will likely be in favor of JobsOhio, which would have a positive effect on the rating.
Pundits criticized Gov. John Kasich, who championed the measure creating JobsOhio, as stepping out of bounds. They say it was illegal to fund the private JobsOhio with public funds.
Regardless, proponents of the deal tout it as a boon for the state because proceeds will be used to help boost economic development in the state.
Something important that I want to point out about the deal is that there is no secondary market for it. According to the preliminary offering circular, “there is no assurance that any market will develop, and if it does develop, that it will continue or that it will provide investors with a sufficient level of liquidity of investment.”
Strong Liquor Sales
Still, maybe that won’t worry some investors considering the state’s very strong liquor sales, as I mentioned above. The state’s liquor division, which is a part of the state’s Department of Commerce, said that in 2012, sales of spirituous liquor – that’s typically beverages that contain more than 20% alcohol – totaled a record $849 million, which was a 7% increase over 2011’s total.
State officials chalked the increase up to Ohioans developing more sophisticated taste buds when it comes to their libations. Specifically, the state’s commerce director, David Goodman, said that the higher sales were due to better product selection and improved inventory management. This led to consumer needs being met without “encouraging increased consumption.”
Interesting, as this is a point I’m sure many would beg to differ.
Restaurants, bars and clubs also showed they were constantly replenishing their stocks of booze for patrons. In fact, last year was the second year in a row that sales purchased by permitted wholesalers showed strong growth. Totalwholesales in 2012 reached $257.8 million, which was a 5.7% increase over 2011.
Among the top selling brands of spirituous liquor is Jack Daniels TennesseeWhiskey, which is made by Brown-Forman (NYSE: BF-B). Several Diageo(NYSE plc: DEO) brands, including Smirnoff Vodka, Crown Royal Canadian Whiskey and Captain Morgan Spiced Rum, are also among the top 10 brands sold in the state.
In speaking of the potential of the deal, Gov. Kasich has said that the JobsOhio model will be studied across the country. Many may respond, “I’ll drink to that!”