State capital markets director John Sinsheimer said Wednesday that Bank of America Merrill Lynch, Citi, JPMorgan, and Loop Capital Markets LLC will serve as co-bookrunners on the July issue of between $1.7 billion and $2 billion to repay loans owed by the unemployment insurance program.
Acacia Financial Group Inc. will advise the state. Mayer Brown LLP and Pugh Jones & Johnson PC are bond counsel. Winston & Strawn LLP and the Tyson Law Group are underwriters’ counsel.
A team of four state officials selected the book-runners based on responses to a questionnaire filled out by broker-dealers on the state’s pre-qualified list of senior managers. The state had sought information on the firms’ experience on unemployment deals.
“When we looked at the Texas deal and saw what they did with the structure in terms of fixed-rate, floaters, and super sinkers, we thought it was advantageous to expand the number of book-runners,” Sinsheimer said. Bank of America and Citi were co-senior managers on Texas’ 2010 sale. The Illinois Department of Employment Security will be the issuer of the bonds, which the state hopes to structure as tax-exempt.
The General Assembly approved the issue late last year. Its supporters contend it is the most affordable means of restoring the trust fund – tapped to cover unemployment benefits -- to solvency by lowering borrowing costs.
The legislation also included business perks to promote job creation. The federal loans were previously interest-free due to a stimulus act provision, but that ended early last year and the state now faces an interest rate payment of more than 4%.
The legislation paving the way for the issuance to repay the government and fund the trust is expected to save $240 million in interest. It leaves existing benefits intact and staves off increased business taxes. The bonds would be repaid with standard business payments into the trust fund.
The funding changes are expected to save businesses at least $400 million through 2019 by eliminating penalty taxes that further federal borrowing would trigger. It also provides a 16% unemployment-insurance tax reduction for the 46% of companies in the state that have not laid off workers during the recession. The state hopes to close on the deal before a Sept. 30 deadline to avoid paying interest on its federal loans this year.
The state intends to sell between $1.5 billion and $2 billion of current and advance refunding GOs for present-value savings between late April and late June.
“The size depends on market conditions,” Sinsheimer said.
The book-runners, based on a rotation list of qualified firms, are Jefferies & Co., BMO Capital Markets, and Duncan-Williams Inc./Rice Financial Products Co. Duncan-Williams and Rice submitted a joint bid during the state’s request for proposals process last year.
Public Financial Management Inc. is adviser. Mayer Brown and the Hardwick Group Inc. are bond counsel. Peck Shaffer & Williams LLP and Quarles & Brady LLP are underwriters’ counsel.
Illinois’ fiscal woes include unfunded pension liabilities of $82.9 billion for a funded ratio of just 43.4%, growing Medicaid costs in the next $33 billion to $34 billion operating budget, and a backlog of $8 billion in unpaid bills.
Those challenges prompted Moody’s Investors Service earlier this year to lower its rating on $27 billion of GO debt one notch to A2 with a stable outlook, making Illinois the lowest state it rates. Fitch Ratings rates the state A with a stable outlook and Standard & Poor’s rates it A-plus with a negative outlook.
Gov. Pat Quinn has pledged to tackle pension reform and asked lawmakers to trim $2.7 billion from Medicaid costs this year. Standard & Poor’s has warned that a lack of action this year could result in a downgrade. A working group is slated to deliver a legislative plan on pension reforms by April 17.
In May, Illinois intends to sell $360 million of taxable senior-lien new-money Build Illinois bonds backed by state sales taxes. Proceeds will finance various capital projects some of which are in the state’s ongoing $31 billion capital program. “Given technical issues with some of the projects, we felt a taxable financing would be more appropriate,” Sinsheimer said.
KeyBanc Capital Markets Inc. is the senior manager. AC Advisory Inc. is the financial adviser. Mayer Brown and Burke Burns & Pinelli Ltd. are bond counsel. Holland & Knight LLP is underwriters’ counsel.
The state’s Build Illinois bonds carry higher rating than its GOs. Fitch assigns a AA-plus to the credit while Standard & Poor’s rates the bonds AAA. Moody’s does not rate them.
The state has $2 billion of outstanding senior-lien sales tax backed bonds and $455 million of junior-lien bonds. The state collected about $7.06 billion in sales taxes in fiscal 2011 that was available for repayment of the bonds. The credit claims a first priority pledge and lien on those revenues, which provided a debt service coverage ratio of 24 times.