CHICAGO — Michigan scored an interest rate of 0.24% on $3.32 billion of short-term, variable-rate bonds it priced Monday to pay off a mounting federal unemployment liability.
The state rushed the bonds — secured by a letter of credit — to market during a traditionally slow holiday week in order to pay off the loan by the end of 2011 and avoid penalties associated with rolling over the liability.
Michigan priced the deal seven days after Gov. Rick Snyder signed enabling legislation and two days after the Michigan Finance Authority approved it.
“That’s what we had to do,” said deputy state treasurer Tom Saxton. “We understand it was tough to do the deal now, and that’s why we’re even more pleased.”
The debt is supported by an LOC from Citigroup that expires when the bonds mature in June 2014. The state expects to come to market early next year with a long-term deal to take out the two-year bonds, officials said.
The transaction makes Michigan the third state, after Texas and Idaho, to issue bonds to repay federal loans for unemployment benefits. Other states, including Illinois, are eyeing the option.
Saxton estimates Michigan will save $150 million to $200 million by paying a low variable rate as opposed to the interest rate charged by the federal government, which was 4.1% in 2011 and is expected to be in the 3% range next year.
“Just going out the gate, we’re borrowing at 24 basis points, and the feds are charging us 4.1%,” Saxton said. Monthly interest savings could reach $10 million.
The state’s rush meant the deal went to market unrated. Moody’s Investors Service and Standard & Poor’s said their ratings would be based on Citi’s LOC.
Of the $3.32 billion, $3.2 billion will be used to pay off the state’s unemployment trust fund, $23 million will be used to replenish the general fund after the state borrowed about $38 million to cover a recent interest payment, $20 million will go into a bond proceeds fund, and more than $2 million will be used for issuance costs.
Citi was senior manager on the deal and will act as remarketing agent on the bonds, which will reset every seven days. It will also be lead manager on next year’s long-term borrowing, though the state will hire co-managers for the deal, officials said.
Citi won the work after the state treasurer’s office issued a request for proposals in early November, saying it needed to issue the debt before the end of the year.
Of the 26 firms that responded, four proposed short-term solutions. “Citi’s was the most aggressive and it was clear they had put in the most thought by helping us do this by Dec. 31,” said Wayne Workman, managing director at Robert W. Baird & Co., the state’s financial advisor. First Southwest Co. also was advisor. Dickinson Wright PLLC was bond counsel.
The bonds will be backed by an obligation assessment paid by employers. The treasurer will set the rate of the assessments as it heads to market next year, Saxton said.
With years of high unemployment, Michigan has not been able to cover unemployment benefits with its own trust fund since 2008.