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Minnesota Picks RBC For $650M

CHICAGO — Minnesota has selected RBC Capital Markets — the winning bidder on a $635 million new-money sale last week — to lead its upcoming sale of at least $650 million of general obligation refunding bonds.

The remaining members of the state’s pool of pre-qualified senior managers — Bank of America Merrill Lynch, Barclays Capital, Morgan Stanley, Piper Jaffray & Co., and Wells Fargo Brokerage Services — will serve as co-seniors.

The deal is slated for later this summer. Its size depends on interest rates, as the state is seeking a minimum present-value savings level of 5%, said assistant treasury commissioner Kathy Kardell.

The sale would mark only the state’s second use of a negotiated transaction to sell its GOs. Lawmakers last year gave state finance officials the ability to sell GOs through negotiation for two years due to the market turmoil of 2008 and 2009.

The state last year used a negotiated sale to test retail waters for its debt, but shifted back to a competitive issue for its sale of three tranches of debt last week totaling $865 million — its largest issue ever.

The sale drew a higher number of bidders than seen on past issues and captured rates among Minnesota’s lowest in a decade as investors looking for tax-exempt paper were drawn to the state’s high-grade credit. Minnesota sees limited value in the BAB program since its savings are typically for debt offered further out on the yield curve, and the state is limited to a 20-year maturity on its GOs.

RBC was the low bidder among eight that ranged from 3.16 % to 3.25% on a $635 million tranche of general purpose GOs.

Piper was the low bid among nine that ranged from 3.12 % to 3.22% on a $225 million tranche of GO bonds for trunk highway projects. Morgan Keegan & Co. was the low bid among 14 that ranged from 1.86% to 2.45% on a taxable $5 million piece for farm loans. 

Kardell had said underwriting support on the competitive issue would influence the selection of the negotiated sale’s team, but she said it was just one in a series of factors officials considered.

“That was a factor and RBC’s was an aggressive bid,” she said. “But we looked at other factors. They had good participation in our negotiated sale last year, have always provided the state with good secondary market support, and submitted a good response in the follow-up to the RFP we did last June. They also have a strong trading, sales, and banking presence in Minnesota.”

Public Resources Advisory Group is adviser on the state’s GO sales. Dorsey & Whitney LLP is bond counsel.

Ahead of the sale last week, all three rating agencies affirmed Minnesota’s rating on its $4.2 billion of GO debt. The state is rated AAA with a stable outlook by Fitch Ratings and Standard & Poor’s and Aa1 with a stable outlook by Moody’s Investors Service.

After draining reserves, Gov. Tim Pawlenty and lawmakers in May agreed on a plan that cut spending and delayed $1.8 billion owed to schools into the next budget cycle to address a $3 billion shortfall in the $57 billion biennial spending plan that runs through June 30.

To manage cash flow as taxes come in later in the fiscal year, the state is delaying tax refunds and aid payments to health care providers, as well as schools and universities. It also plans to establish a $600 million line of credit that can be tapped if needed.

Going forward, Minnesota will be challenged to address projected deficits due to its heavy reliance on one-time revenues in recent years and Pawlenty’s pledge not to raise taxes, Moody’s wrote.

The state “faces significant obstacles in achieving structural budget balance in the next budget cycle as a result of the nonrecurring actions taken to date,” Moody’s warned. “Minnesota is currently projecting a $5.8 billion deficit in the 2012-2013 biennium.”

Fitch said the state benefits from a broad-based economy, good management, and an excellent debt structure. But a key rating driver is the “ability of the state to implement budget balancing measures and rebuild its reserve position as economic and revenue conditions improve,” analysts wrote. “Minnesota confronts a large projected budget gap for the coming biennium, as many of the gap-closing measures used in the current biennium were non-recurring.”

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