CHICAGO — Fresh from a new-money Build Illinois sales tax-backed sale, the state plans a return trip to the market early next month to refund $600 million in its largest issue ever under the 28-year-old bond program.
A roughly $1 billion new-money general obligation deal will follow over the summer and then state procurement officials will launch a request for qualifications to establish new lists of qualified underwriters, financial advisors, bond counsel, and underwriters counsel. The current lists expire at the end of August although any deal in process can still proceed past the deadline, state capital markets director John Sinsheimer said.
The current and advance refunding of outstanding senior lien Build Illinois sales-tax-backed bonds is tentatively set for June 11 although the timing is dependent on market conditions.
The highly rated tax-exempt bonds will sell under a junior lien that carries the same high-grade ratings as their senior counterpart.
“We expect the present-value savings to be significant,” Sinsheimer said.
The transaction also will free up for state use between $30 million to $40 million of reserves no longer required to be held under the junior lien. The state will conduct an online roadshow ahead of the sale.
The deal marks the 50th under the Build Illinois capital bonding program established in 1985.
Lawmakers have periodically bolstered the authorization to provide funds for capital projects. Sinsheimer said the deal represents the largest single new-money or refunding transaction ever sold under the program.
Barclays is the senior manager. Northern Trust Securities and Guggenheim Securities LLC are co-senior managers and another four firms round out the team as co-managers. A.C. Advisory is financial advisor and Mayer Brown LLP and Charity & Associates PC are bond counsel and Chapman and Cutler LLP and Reyes Kurson are underwriter’s counsel.
The state earlier this month took competitive bids on $300 million of taxable, new-money Build Illinois sales tax bonds. The state drew 11 bids and paid a true interest cost of 3.286% with the 10-year maturity yielding 80 basis points over the 10-year Treasury rate.
Illinois’ sales-tax backed bonds carry a AAA rating from Standard & Poor’s and AA-plus from Fitch Ratings.
While the bonds typically have been subject to some interest rate penalty for the Illinois name, the high ratings shield them from the steeper penalties investors impose on the state’s stressed GO paper, which is rated in the low-to-mid single-A category.
Fitch on Thursday affirmed its rating. The state currently has $2.63 billion of senior-lien Build Illinois bonds and $400 million of junior-lien bonds. Bonds issued under the program benefit from a statutory first lien on the state’s share of a 6.25% sales tax and strong non-impairment language.
Senior-lien debt issuance is limited to 5% of prior year sales tax revenues and 9.8% on junior-lien obligations, resulting in very strong coverage ratios even during economic downturns when revenues slip. The sales tax generated almost $7.7 billion in fiscal 2012, with pledged revenues providing 21.7 times coverage of debt service on all of the Build Illinois debt.
The timing on the GO sale is not yet set. The state’s GO ratings could see further deterioration if lawmakers fail to act on pension reforms. The General Assembly is set to adjourn at the end of the month and two dueling pension reform packages are pending.
The state is grappling with $95 billion of unfunded pension obligations with the system just 40% funded. Pension payments are slated to rise by nearly $1 billion to $6 billion in fiscal 2014, consuming 19% of the state’s general fund. Lawmakers also must adopt a new $35 billion operating budget.
Standard & Poor’s rates the state’s $27 billion of GOs A-minus and assigns a negative outlook, making Illinois its lowest-rated state. Fitch assigns an A rating to the state’s $27 billion of GO debt and has the credit on negative watch. Moody’s rates Illinois GOs A2 with a negative outlook.
The state last finalized its underwriting pools in September 2011. It expanded its pool of senior managers to 25 from 10. Another 10 firms were placed into the co-senior manager pool and nine more on the co-manager list. The state also set a pool of six qualified advisers.
A lottery was held to set the rotation for underwriters, financial advisers and underwriter’s counsel although the state retained some flexibility in going out of rotation for specialty transactions or refundings. With that RFQ Illinois also chose one firm to serve as bond and disclosure counsel, Mayer Brown, for consistency in its reporting standards. The firm then picks a co-bond counsel.
