CHICAGO — Illinois switched bond counsel Monday when it named a new list of firms to handle the state's bond sales.
Chapman and Cutler LLP won the position of sole bond and disclosure counsel over 13 other firms, including incumbent Mayer Brown LLP which had received the top score in the state's 2011 procurement process.
Illinois also announced new pools of underwriting and financial advisory firms to draw from for bond sales over the next two years.
The state chose firms for the pools based on their scores in the procurement but set a rotation list of underwriters based on a random drawing held on Jan. 10.
Illinois placed the top 15 underwriting firms ranked by grade in a senior manager pool, the second in a co-senior manager's pool, and 15 in a co-managers pool.
The senior managers list is led by Citi which will run the books on a $1 billion general obligation sale set for Feb. 6. The state can go out of order on specialized financings such as asset securitizations, swaps, and refunding issues.
The state selected six advisory firms based on their scores with the order of their rotation on deals also set by a random drawing. The order is Peralta Garcia Solutions, Columbia Capital Management, Public Resources Advisory Group, Acacia Financial Group, Public Financial Management Inc., and FirstSouthwest.
The state launched the RFP last fall with a November deadline.
Officials said the winner-take-all bond counsel decision was made based on the firms' scores during the procurement process, but the shift follows an incident last year that some believe politically embarrassed the state although it was not tied to the firm's work.
The incident involved prominent Mayer Brown partner Ty Fahner acting in his role as president of the Civic Committee of the Commercial Club of Chicago which led a campaign to pressure the state to pass sweeping pension reforms.
Illinois political blog Capitolfax posted a video last 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, a former Illinois attorney general, 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. The state's pension funding woes have driven its credit ratings down to the weakest level among states.
State officials have declined any comment on whether they were angered by Fahner's comments.
On Monday, deputy budget director Abdon Pallasch said of the bond counsel change: "Following the expiration of the previous contract, the state conducted a standard procurement for its next bond counsel and Chapman & Cutler was selected based on the merits of their proposal."
The state shifted in 2011 to a single firm, from a rotating list of qualified firms, 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 has said it wanted to ensure consistency in the fiscal information provided in offering statements, roadshow presentations, and in public comments.
Illinois hired Chapman and Cutler in 2010 to update its disclosure policies and then expanded its pension disclosure in offering statements. The state last 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 under a prior administration. The state and SEC settled the charge without fine or penalty.
Law firms submitting proposals were scored on four questions with 75 points assigned to a description of the firm's experience as bond counsel and disclosure counsel, 75 points for team members and their experience on Illinois credits, 150 points for a discussion of how the firm would assist the state in meeting regulatory changes on disclosure, and 75 points for a discussion of state statutory restrictions on GO issuance and recommendations for changes.
Chapman was the top bond counsel in Illinois for the first half of 2013 and all of 2012 with Mayer Brown in the second slot in 2012 and for the first six months of 2013.
The state tweaked the scoring system it used on its underwriting selection process to limit how many firms could make the senior pool to 15. The state used a scoring system process two years ago that put all firms which received a minimum score into the senior manager pool.
It originally generated a list of 25 senior managers although five agreed to move down to the co-senior manager pool. The large number 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 and financing ideas.
Illinois was the top borrower in the Midwest for the first six months of 2013, issuing $3 billion of debt in five transactions. The state also finished off 2012 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 order of senior managers is Citi, Wells Fargo Securities, William Blair & Co., JPMorgan, Barclays Capital, Morgan Stanley, PNC Capital Markets LLC, Bank of America Merrill Lynch, Jefferies & Co., RBC Capital Markets, Loop Capital Markets LLC, Stifel, BMO Capital Markets, Goldman Sachs, and Raymond James.
