Wisconsin’s first VRDB

On May 29, 2019, SCS served as senior manager and initial rate-setter for the State of Wisconsin’s $53.8 million General Obligation Variable Rate Demand Obligation Notes of 2019, Series A transaction.
Following SCS’ initial rate setting, the VRDOs are to be remarketed weekly on the Clarity Bidrate Alternative Trading System (“Clarity”).

The Bonds were not only the first Wisconsin transaction (and only the second overall) to use Clarity as the weekly rate-setting platform, but they were also the State’s first foray into the VRDB space. The State used self-liquidity on its weekly VRDBs.

The Bonds

The Bonds bear interest in weekly mode, set on an ongoing basis on each Wednesday on the Clarity platform with a maximum annual rate of 9.00%, payable on the first business day of each month.

  • On each Wednesday (the rate setting date), investors may place and edit bids until 12:30 pm.
  • All bids are published on Clarity in real time and all investors can see the interest rates and par amounts – but not the investor names – of all other bids.
    – The combination of real-time market transparency, the ability to see all bids in comparison to the market, and the ability to edit bids until the cutoff time creates a highly competitive marketplace.
  • The new interest rate is then published at 1:00 pm on that Wednesday and is effective on that Thursday.

The Bonds are General Obligations of the State of Wisconsin, with the Bonds’ liquidity supported by a Self-Liquidity Standby Agreement from the State.

The Sale and Initial Rate-Setting

The State had never issued a VRDO in its history, which required extensive work by the State and the working group to design effective documentation, procedures, and transaction strategies in order to ensure smooth and efficient transaction execution.

Rather than seek an LOC provider, the State chose to utilize self-liquidity to support the notes, which allowed additional investors to participate that were otherwise full on various LOC providers.

In the week prior to pricing, there was a significant dislocation in the VRDO market, with daily rates in the 2% range and weekly rates in the mid-1% range. These headwinds precluded a number of otherwise active investors from participating in the initial pricing, who nevertheless explicitly stated their desires to participate in the ongoing weekly Clarity reset process once the market stabilized.

Despite the market turbulence, SCS was able to successfully execute the transaction through thorough investor education and extensive premarketing.

  • SCS engaged with a number of accounts in the two weeks prior to pricing in order to generate interest in the product and garner participation, and
  • Prior to and on the day of pricing, SCS and the State worked closely with key investor accounts—organizing calls between the issuer, investors, and various counsels—in order to maximize investor demand.

During the order period, SCS generated $88.8 million in orders against $53.8 million in par, with 6 different investors placing orders and receiving allotments.