CHICAGO — Michigan today will price $1.3 billion of fixed-rate notes as part of its annual borrowing to cover expenditures throughout the fiscal year as its awaits an influx of revenue.
Moody’s Investors Service and Standard & Poor’s assigned their top short-term marks to the notes: MIG-1 and SP-1-plus.
For the first time, the state did not ask Fitch Ratings to rate the deal.
The general obligation notes carry Michigan’s full faith and credit pledge. They mature on Sept. 30, 2010, the last day of the current fiscal year. Under state law, the treasurer is required to ensure that debt service on all GO debt is paid on time using any available revenue under the treasurer’s control.
Michigan’s constitution limits short-term borrowing to 15% of undedicated revenue received in the prior fiscal year.
The $1.3 billion borrowing represents nearly the full 15% cap — undedicated revenue for fiscal 2008 totaled $8.73 billion — and the state does not expect to borrow any more notes this year, officials said.
JPMorgan will lead the transaction. The firm was selected via Michigan’s request for proposals process, according to state financial adviser Wayne Workman of R.W. Baird & Co. Dickinson Wright PLLC is bond counsel.
Unlike last year, when the state was forced to split its $1.4 billion GO deal into two sales to help navigate a market in turmoil, the finance team sees this year’s issue entering a much more stable market and capturing an interest rate below 1%.
“We feel much better in terms of certainty in this market,” said Tom Saxton, the state’s deputy treasurer for bond finance. “Last year was chaos.”
Michigan opted not to purchase a letter of credit to enhance the deal this year unlike the last two years.
“There aren’t good letters of credit available in terms of credit quality,” Workman said. “And the quality [LOCs are] very expensive. It would not be to the state’s economic advantage to buy one.”
It’s the seventh year in a row that Michigan has sold cash-flow notes. It will use proceeds from the short-term issue to make payments throughout the fiscal year as it waits for receipts from general fund revenues.
The general fund and the school aid fund — the state’s two largest funds — are expected to face deficits starting in March 2010 even with the borrowing, analysts said.
“Michigan’s repeated reliance on cash-flow notes underscores a financial position weakened by an arduous period of economic underperformance,” Moody’s analyst Edward Hampton wrote in a recent report on the borrowing.
Moody’s, which now rates the state’s GO debt Aa3, has downgraded the state several times from its former rating of Aaa in 2004. In March of this year the agency revised its outlook on Michigan to negative from stable.
Despite its problems, the state is able to support Moody’s top short-term rating due to the GO pledge, the liquidity outside the two main operating funds that will be used to pay the debt back, and a history of strong financial management, Hampton said.
Standard & Poor’s said its SP-1-plus rating reflects the strong coverage provided by the state’s funds and the GO pledge. The agency rates the state’s outstanding GO debt AA-minus.
Fitch downgraded the state to A-plus from AA-minus in July, citing “significant deterioration” of the economy triggered by the sharp decline of the automotive manufacturing sector.
The decision to drop Fitch fron the deal was an economic one, according
to Workman.
“We’re looking for every way we can to operate more efficiently,” he said. “The underwriters [on this deal] said we could go with two rather than with three.”
Michigan has not yet decided whether it will ask Fitch to rate future deals, Saxton said. “We’re going to talk to the underwriters each time, and decide on a deal-by-deal basis,” he said.
A Fitch spokesman was not available to comment by press time.
