CHICAGO — In a transaction that will mark the state’s first-ever use of negotiation to sell its general obligation bonds, Minnesota is putting the finishing touches on a $480 million new-money issue with an eye towards testing retail appetite for its top-rated paper.
The state intends to hold a one- to two-day retail order period through its underwriting team in mid- to late October and then would take competitive bids on whatever bonds remain outstanding, said state debt manager Kathy Kardell.
The use of a negotiated sale permits the state to test the
retail waters.
“This will be our first opportunity really to test state and national retail interest,” Kardell said yesterday. “Retail is a very strong participant in this market and we always get a fair number of individuals who complain that they cannot buy our bonds at least in the primary market.”
Minnesota offers an exemption on interest earnings from state income taxes.
The state’s issuance of about $1 billion in new money and refunding GOs so far this year drove the decision to gear the upcoming sale to retail.
“We’ve maxed out what we feel comfortable issuing” with institutional buyers in mind, Kardell said.
She said she favors taking competitive bids for any portion of the deal that remains because “it will always be the state’s preference to sell its GO bonds competitively” when institutional buyers are the primary audience and the market is solid.
The state previously was required by statute to sell all of its GOs competitively, but lawmakers granted Kardell the ability to use negotiated sales for two years beginning July 1 — a measure included in the fiscal 2010-2011 budget — due to the market turmoil of last year and early this year.
The state directly felt the impact of that turmoil last fall as it was readying a $440 million transaction. When the market froze following Lehman Brothers’ bankruptcy, officials delayed the transaction and watched for other large competitive deals to hit the market first, but they were forced to put off the deal until early this year as they awaited an updated revenue forecast.
The state earlier this summer conducted a request for proposals process to qualify underwriters for any potential negotiated GO sales. The state earlier this month named six firms to its qualified pool of senior managers. They are Banc of America Securities-Merrill Lynch & Co.; Barclays Capital, Morgan Stanley, Piper Jaffray & Co., RBC Capital Markets, and Wells Fargo Brokerage Services-Wachovia Securities.
The state named another 10 firms to a pool of qualified co-managers. They are Citi, Cronin & Co., Doherty & Co., Fidelity Capital Markets, Goldman, Sachs & Co., Jefferies & Co., JPMorgan, Loop Capital Markets, Robert W. Baird & Co., and Siebert Brandford Shank & Co.
All 16 firms will participate in some capacity on the upcoming GO sale but the senior manager positions have not yet been finalized, Kardell said yesterday. Public Resources Advisory Group Inc. is financial adviser.
The state has on occasion used a negotiated sale on its revenue bond issues, including a 2008 deal for its 911 emergency system and in 1995 on a revenue sale for the former Northwest Airlines. Ahead of the new GO sale, the state intends to sell the third in a series of revenue bond issues to raise funds for its 911 system.
The state will sell $60 million with Jefferies in the lead spot, Piper in the co-senior manager spot, and Cronin and Siebert as co-managers. It is planned for early next month. Ehlers & Associates is financial adviser. About $92 million of legislatively authorized borrowing under the program will remain after the transaction is completed.
Kardell said she opted for the negotiated method on the 911 issue because of favorable pricing on the November 2008 deal in which the state used a negotiated sale given the market turmoil and the split ratings on $75 million of outstanding 911 bonds. Fitch Ratings rates the program AA-minus, Moody’s Investors Service rates it A1 and Standard & Poor’s rates it AA-plus.
The state has nearly $5 billion of outstanding GOs that carry top marks from Fitch and Standard & Poor’s and a Aa1 from Moody’s. Fitch assigns a negative outlook to the credit. All three affirmed the credit earlier this summer ahead of a $600 million new-money and refunding GO sale.
“The rating reflects Minnesota’s deep and diverse economy supported by several regional economic hubs and anchored by the Minneapolis-St. Paul metropolitan statistical area, the center of the upper Midwest economy,” said Standard & Poor’s analyst Corey Friedman.
Faced with a $4.6 billion deficit, negotiations aimed at achieving a balanced budget for the fiscal biennium that began July 1 came down to the wire between Republican Gov. Tim Pawlenty and the Democratic-controlled Legislature.
Lawmakers adjourned after adopting spending bills that lacked sufficient revenue to cover them and Pawlenty responded by slashing or deferring $2.7 billion of funding for local government aid, health and human services, and education in the $57 billion budget.
The Legislature’s next session, which begins in February, will be devoted to crafting a bonding bill package. The state has received project requests seeking $2 billion in support from state agencies and another $600 million in local government requests. The state’s 2008 capital budget totaled about $700 million.
