CHICAGO – Illinois is asking underwriters vying for future senior manager work for advice on how best to capitalize on stopgap budget legislation that allows for the issuance of as much as $2 billion of refunding debt.
"Illinois is not restructuring bonds, but planning to refund bonds for savings only," Gov. Bruce Rauner's spokeswoman Catherine Kelly said in an email. "The stopgap bridge contemplates a refunding that generates $20 million in savings in fiscal year 2017 which will likely be done in one deal." The timing hasn't been determined.
The legislation frees the refunding of many decade-old structuring rules that state officials have complained stymies refundings. The limits – previously exempted in fiscal 2009, 2010 and 2011 – extends only through fiscal 2017 which runs through June 30, 2018.
The state asks underwriters seeking inclusion in new underwriting pools for negotiated sales to "discuss how your firm would approach a general obligation bond refunding transaction for the state in fiscal year 2017," given changes permitted in the legislation.
"Include analysis your firm would provide, suggested parameters to optimize savings in FY17 while maintaining savings in each year, as well as minimizing structuring bonds and negative arbitrage," the request for qualifications published Friday adds.
The RFQ closes July 22. The state will establish a new co-manager pool and a new senior manager pool with each in place for an initial three-year term. The state expects to qualify up to 15 firms as senior and co-senior managers and up to 15 for the co-manager pool.
The firms would be selected to work on negotiated sales and "other capital markets and debt management initiatives," according to the documents.
Senior manager applicants must have run the books on at least two transactions with a minimum par of $300 million in 2016 and will receive some points for having a strong presence in the state and submitting bids on the state's past competitive sales.
Firms are asked to submit a sales and marketing plan for issues assuming a fixed-rate structure.
The state documents say the Governor's Office of Management and Budget "will select firms for each transaction based on the specific firm's qualifications relative to the size and complexity of the contemplated issuance, participation in previous competitive sales, formal offers of credit and other value-added services." The state also will seek to meet goals on including regional, minority, women, and veteran owned firms.
"The state makes no representation that every underwriter on the list will be engaged on a transaction, but the state will attempt to select each member of each qualified pool at least once during the time period covered by the RFQ," the documents add.
"GOMB will choose underwriters for each transaction from a qualified pool to best serve the needs of the state," Kelly added.
In recent past pools, the state held a lottery to set a rotation among firms. In a competitive selection process conducted in 2013, under then Gov. Pat Quinn, the state established a senior manager pool of 15, a co-senior pool of 15, and a co-manager group of 15.
The state has sold its last two deals competitively, with Bank of America Merrill Lynch submitting the winning bids on both. Debt rules required that at least 25% of principal issued in fiscal year be sold competitively.
While the state's borrowing level has plunged over the last two years as the current $31 billion capital program winds down, it could rebound if lawmakers in the coming year resolve their political differences on a long term budget plan and turn their attention to a new capital program.
On refunding prospects, the budget legislation permits $2 billion of refunding. Unable to break a year-old logjam on a balanced fiscal 2016 or 2017 budget, Rauner and his fellow GOP members and the General Assembly's Democratic leaders passed a series of bills on June 30 that fund many remaining fiscal 2016 expenses not covered by continuing appropriations or court orders and consent agreements.
The legislation signed by Rauner also provides some funding for the first half of fiscal 2017 and funds kindergarten through 12th grade education for the full year. Lawmakers say the deal will see the state through the contentious November elections, after which it could be easier to impose tax increases to cut a roughly $5 billion deficit and a mounting bill backlog of about $8 billion.
The fiscal 2017 refundings would be freed of rules that don't allow refunding maturities to extend beyond the original maturities, require equal annual principal amounts, with the first maturity issued occurring within the same or next fiscal year of issuance, or achieve at least 3% in present value savings.
The $2 billion of refunding won't have to comply with rules that limit negotiated issuance to 75% of total principal borrowing for a fiscal year.
The competitive sale requirements and debt structuring reforms were pushed through by House Speaker Michael Madigan, D-Chicago, more than a decade ago in a backlash against then Gov. Rod Blagojevich's administration.
Some lawmakers were angered by the use of borrowing and structures that delayed principal repayment in new-money and refundings and extended maturities to 30 years from a traditional 25-year term.
The state has paid steep penalties to borrow, but will benefit from record low interest rates. The state saw a record low true interest borrowing cost of 3.7425% on its sale last month, thanks to the low prevailing rates, even as it suffered fresh downgrades over its budget gridlock that drove the spread on its 10-year bonds up to nearly 200 basis points.
How much new state borrowing the market can easily digest without a further widening of spreads is a question market participants say is open.
Moody's Investors Service and S&P Global Services both dropped the state one notch in the past month, to Baa2 and BBB-plus, respectively, and Fitch Rating has put the state's BBB-plus rating on negative watch.
