CHICAGO — Underwriters, financial advisory and law firms interested in working on Illinois' bond deals over the next several years have until Nov. 4 to submit their qualifications to be considered for a spot on the state's updated financing pools.
Illinois was the top borrower in the Midwest for the first six months of the year, issuing $3 billion of debt in five transactions. The state also finished off last year in the top slot in the Midwest, selling $5 billion of debt in seven deals, according to Thomson Reuters. New money funds the state's ongoing $31 billion capital program.
The state will stick with a rotating list of six financial advisors with a procurement team picking those that receive the top scores. The state will select one sole bond and disclosure counsel, sticking with a change it made in its last RFQ process two years ago after years of using a longer rotation list.
The state has tweaked the scoring system it uses on its underwriting selection process to limit how many firms can make the senior pool. Under the new system, the 15 firms that receive the most points will go into the senior manager pool, the next 15 will go into a co-senior pool, and the next 15 will qualify for the co-manager pool.
The state used a scoring system on the last underwriting selection process two years ago that put all firms which received a minimum score into the senior manager pool. It generated a list of 25 senior managers although five agreed to move down to the co-senior manager pool. The list marked a significant expansion from just 10 firms that made the top pool two years earlier. A total of 12 firms filled the co-senior pool after the five moved and nine made the co-manager list.
The state's scoring system and large number of senior managers drew private complaints from broker-dealers, especially those that believed they had worked hard to maintain a good relationship with the state by providing it with updated market data, financing ideas, and had submitted a strong proposal.
"We are trying to make this as fair and inclusive as possible," the state's capital markets director John Sinsheimer said in a recent interview. "We spent a lot of time and thought on it. We know people work hard on the RFQ and would like to fully utilize the rotation list.
"My goal is to get the best deal for the state," he said. "We would like to be fair to banks that do the work and give them as good an opportunity to work on a deal, but we make no guarantees."
The state will select the size and composition of an underwriting syndicate based on the size and complexity of the proposed transaction, the RFQ informs broker-dealers. "The state makes no representation that every bank on the list will be engaged or the size, timing and complexity of the transaction that a bank may be asked to support."
The new rotation list within each pool will be randomized in some fashion although Sinsheimer said the state hasn't settled on a method. It held a lottery two years ago. The state makes clear in the RFQ that it retains the ability to go out of order on specialized financings such as asset securitizations, swaps, and refunding issues.
Deadline for submissions on all the pools is Nov. 4 and the new pools take effect Nov. 28. They remain in place for two years with options to extend annually for another two years. The state has no near-term sales set and the state's next issue will be sold competitively under state debt management laws that require the first issuance of any new fiscal year be done competitively.
"At this point, we are still evaluating what our needs are" for bond-financed capital work, Sinsheimer said.
The state intends to use at least one advisor from the list on each of its bond issues regardless of size and whether it's sold through negotiation or competitively, the RFQ reads.
The state will select the top 15 scoring firms that submit their qualifications to serve as underwriters counsel. The state again will pick one sole firm to work in the dual role of bond counsel and disclosure counsel. The top scorer, if not a minority-women-veterans or otherwise certified under the state's business enterprise program, must subcontract at least 30% of its work to one.
The state two years ago shifted to one firm to serve in the dual role of bond counsel and disclosure counsel in response to increased scrutiny of municipal debt by the Securities and Exchange Commission and the Municipal Securities Rulemaking Board. The state wanted to ensure consistency in the fiscal information provided in offering statements, roadshow presentations, and in public comments.
Illinois hired Chapman and Cutler LLP in 2010 to update its disclosure policies and then expanded its pension disclosure in offering statements and reported an SEC probe of past disclosure. The state earlier this year settled an SEC charge of securities fraud for misleading investors on the financial risks posed by its pension funding plan on sales between 2005 and 2009. The state and SEC settled the charge without fine or penalty.
State officials have declined to comment on whether they were angered by prominent Mayer Brown partner Ty Fahner's comments that he and other members of the influential Civic Committee of the Commercial Club of Chicago had lobbied rating agencies to downgrade the state over its pension woes.
Fahner serves as president of the committee, which also has members in top posts at various financial institutions that also do bond business with the state. The committee has led a campaign to pressure the state to pass sweeping reforms that address its $95 billion of unfunded liabilities.
The Illinois political blog, Capitolfax, posted a video earlier this year of a luncheon address by Fahner in which he answered a question from the audience saying that members of the committee had talked with rating agency analysts and questioned why they had not more steeply downgraded the state. He accused them of enabling the state.
Fahner later said in an interview with Capitolfax that he misspoke and the committee never talked to analysts. Representatives from Fitch Ratings, Moody's Investors Service, and Standard & Poor's all said they never received any calls.
A union group known as We are One Illinois called for a further probe, but the state has withheld any comment.
"Did members of the Civic Committee speak to the ratings agencies, as Fahner clearly stated initially? If so, what transpired? Did any Civic Committee members profit from these actions? How did the role of Fahner's law firm as state bond counsel and the role of many Civic Committee members as bond underwriters impact their efforts to lobby to reduce the state's rating?" the coalition said in a statement.
Illinois' steady levels of mostly GO and sales-tax backed issuance over the last two years have come at a price, with investors demanding steeper interest rate penalties on its GOs because of rating downgrades and investor concerns over the state's pension crisis. All three rating agencies assign a low-single-A level rating to the state's general obligation debt and a negative outlook, making Illinois the lowest rated state. A special legislative conference committee has been attempting to craft a new pension reform plan to win over various political factions. The General Assembly's annual fall veto session begins Tuesday but it's unclear whether lawmakers may act on a reform plan.
