CHICAGO — The Metropolitan Water Reclamation District of Greater Chicago board of commissioners on Thursday advanced the plans for a $500 million sale of mostly Build America Bond in mid-December, though officials said the timing, size, and mix of securities hinge on interest rates.
“The market is in shambles but we are proceeding as planned for now,” said the triple-A rated district’s treasurer, Harold Downs. “We could move maturities around, back off from doing BABs, and do more tax-exempt or borrow less if interest rates keep rising.”
Spreads on BABs to comparable Treasuries are rising and the 30-year triple-A yield curve has increased 76 basis points since Nov. 1 as the flood of supply coming from issuers ahead of the expiration of the BAB program at the end of the year exceeds demand.
The district currently intends to include $120 million of non-BAB taxable general obligation bonds and a small piece of tax-exempt GOs in the deal. Proceeds would help finance the district’s long-term capital program of more than $2.5 billion that includes plant expansions and improvements, sewer upgrades, bio-solids management projects, and deep-tunnel related projects. All three major rating agencies last year affirmed the agency’s top marks on $1.4 billion of outstanding debt.
With little comment, the district board approved an underwriting team for the December deal and qualified pools of senior managers and co-managers to draw from for about $450 million of additional borrowing planned over the next three years.
Establishing qualified pools marks a departure from the district’s more informal selection process on past sales. The shift comes as the pricing of the district’s $600 million BAB sale last year is being scrutinized by the Securities and Exchange Commission and the Internal Revenue Service. The district responded to SEC questions in June and is still preparing a response to the IRS audit, Downs said.
Downs said he preferred to stick with a negotiated deal over competitive bidding because he believes it is the more accepted form for BAB sales and he believes the use of request for proposals introduced competition and pricing limits into the process of selecting a team.
The district contacted 146 firms about submitting proposals and another 46 requested proposal documents. The district received 29 “acceptable” proposals by the Oct. 22 deadline. A group of five officials from the district’s treasury, finance, law, and procurement sections named 13 firms to a pool of qualified senior managers and an additional seven to a pool of qualified co-managers. All of the firms scored at least 70% on their technical qualifications.
Once firms are appointed to an individual deal, they are removed from the qualified list from which they were picked. Firms that made both lists will remain qualified to serve in the other role. The board approved the selection of JPMorgan as senior manager and Citi as co-senior for the sale next month. Another seven firms will serve as co-managers.
Aside from their high technical rankings, JPMorgan and Citi offered the lowest prices when asked earlier this month for final pricing offers. The underwriting group fees are limited to $3.25 per $1,000 of the par amount of bonds sold. Several underwriters said the fee was low given the level of capital risk amid an oversupply of bonds.
The district’s board previously selected Public Financial Management Inc. and Gardner, Underwood & Bacon LLC as co-financial advisers. Downs said the district intends to use a competitive selection process for financial advisers in the future.
The district used A.C. Advisory Inc. and Scott Balice Strategies as advisers on the 2009 sale. Mesirow Financial Inc. was senior manager and Loop Capital Markets LLC was co-senior. Both broker-dealers made the list of qualified senior managers. Loop is a co-manager on the new sale but Mesirow is not on the team.
