CHICAGO — Six weeks after pulling its last bond sale, Illinois plans a full-court press with investors and will drop a bidding feature that had dampened the interest of some broker-dealers as it prepares to competitively sell $800 million of debt next month.
The state released the preliminary offering statement for the deal late Tuesday. It will offer $450 million of tax-exempt general obligation bonds and $350 million of taxable GOs. The state will take competitive bids on April 2. Mayer Brown LLP and Burke Burns & Pinelli Ltd are bond counsel and Public Resources Advisory Group is advising.
Officials had planned a $500 million sale in late January but pulled it as indications from potential bidders suggested the state would be forced to pay a steeper penalty than originally expected.
Illinois faced headwinds from negative credit action and tougher market conditions that included pricing volatility and unplaced paper from the previous week’s transactions. Several potential bidders had also expressed a hesitancy to participate in the deal due to the imposition of a two-minute window that allowed firms to observe competing bids and then revise their own, according to Municipal Market Advisors and several other market sources. The state is dropping that process in the upcoming sale.
Illinois capital markets director John Sinsheimer was in New York City Wednesday to update rating agencies on Gov. Pat Quinn’s proposed $36.9 billion fiscal 2014 budget and the status of pension-reform efforts to rein in skyrocketing payments and $95 billion of unfunded obligations.
The state also intends to conduct investor meetings and a roadshow in hopes of easing concerns over its battered credit. Officials will stress the state’s settlement of a Securities and Exchange Commission charge of securities fraud over past pension disclosure.
The SEC accused the state on Monday of misleading investors on the financial risks posed by its pension funding plan in offering statements on $2.2 billion of GO sales between 2005 and 2009. The state settled the matter by agreeing to a cease-and-desist order simultaneously, without fines or penalties.
“We have not had a roadshow since last April and want to make sure that investors understand the budget and have correct financial information,” Sinsheimer said Wednesday. “We also want the market to understand the impact of the SEC action. It’s a done deal.”
The state will stress to broker-dealers and investors that the SEC’s order takes Illinois to task for disclosure practices only up to 2009. Quinn took office in early 2009 and the finance team moved to overhaul disclosure in 2010 after the SEC charged and settled with New Jersey in August 2010 over its pension disclosure. The state debuted changes overseen by Chapman and Cutler LLP in early 2011.
The state was notified by the SEC in September 2010 that it had launched an inquiry relating to potential reductions and savings in state payments to its pensions. The inquiry “ultimately turned to disclosures relating to the statutory funding plan” adopted in 1994, according to the new offering statement.
The fraud charge may further dent the state’s image tarnished by its deteriorated credit and mammoth pension obligations, but Sinsheimer noted that the SEC decided not to impose any sanctions and its positive comments on the Quinn administration’s pension overhaul.
“Our pension disclosures have been greatly enhanced and improved in the last two years,” Sinsheimer said. Officials also stressed the strong priority its GO pledge enjoys on state revenues.
Sinsheimer said the increased size of the transaction is due to project demand.
“We are looking at the spring construction season and have more projects that need to be funded than in January,” he said, adding that it’s unlikely he would again postpone the offeromg. “The coffers in the capital program fund are in need of money and our intention is to continue with our capital program.”
In addition to the increased investor outreach, Illinois’ bidding process won’t include the so-called two-minute window that was to be used on the January deal. It permits broker-dealers to observe competing bids and revise their own.
Sources said imposition of the rule upset several large underwriters and they considered passing on the issue, which could have negatively impacted rates. Bidding on the January deal was to be conducted using Grant Street Group’s MuniAuction platform which offers the two-minute window. The state will conduct the bidding through PARITY.
Sinsheimer declined to comment on the state’s decision to drop Grant Street on the new sale and said Illinois has every intention of working with the firm again. “We were very pleased with the results on our deal last September,” he said.
The state received a total of 94 bids from 18 broker-dealers on its $50 million September sale. It typically receives about 10 bids. It marked Illinois’ first use of the MuniAuction platform and the two-minute bidding rule. Raymond James won the deal with a true interest cost of 2.491591%.
MMA in its weekly commentary after the postponed sale noted the state’s various headwinds: “What has been a critical overlooked factor was the… imposition of a ‘two-minute window’ rule for bidding. In our opinion, the timing was poor for a novel and aggressive construction like this, in particular as it may have been a primary factor in the deal’s cancellation.”
The MMA team spoke with several broker-dealers who planned to take a pass on the deal due to the rule. Several market sources said the size and shorter duration of the September deal was better suited for the bidding platform than the $500 million sale. A tougher market, the deal’s size, and negative headlines over the state’s recent downgrade by Standard & Poor’s made the deal a poor candidate.
“Broker-dealers were risking a lot more capital on bonds that they might not have been able to place right away. There’s a lot of uncertainties and if they put in an aggressive bid they want to be rewarded. They don’t want to show their cards and then lose,” said one market source.
Grant Street’s John McCarthy said the firm was disappointed the state decided to go with another bidding platform but looks forward to again working with the state. “We are proud of the work we did with the state in September 2012.
The sale was a huge success and it went off without a glitch,” Montgomery said, adding that the firm’s auctions can be conducted with or without the two-minute bid window. McCarthy said the firm has received complaints from some broker-dealers when the two-minute rule was not used because they didn’t have the opportunity to improve their bids.
Standard & Poor’s rates Illinois’ $26 billion of GO debt A-minus with a negative outlook. Fitch Ratings has the state’s A rating on negative watch. Moody’s Investors Service assigns a negative outlook to Illinois’ A2 rating. The state’s paper was trading at about 140 basis points over the Municipal Market Data benchmark on 10-year maturities this week.
Traders wondered in January why the state didn’t opt for a negotiated sale. Under state statutes, the state must sell its first issue of the year competitively.