CHICAGO — Cook County, Ill., will enter the market beginning Wednesday with $600 million of taxable and tax-exempt bonds in its new administration’s first borrowing since taking office last year.
The transaction is a mix of new-money and refunding bonds for restructuring purposes with some minor net present-value savings. The refunding will push off debt service payments for the next three years, achieving $300 million of budget relief for the cash-strapped county government.
For investors, the finance team played up the county’s structural strengths, including its unrestricted ability to tax, its diversity, and its size as the second-largest county in the United States.
The team sought to downplay any connection to Illinois’ fiscal problems, to help stem the so-called Illinois penalty that results in some added interest costs for borrowers in the state. They stressed to investors that the county relies little on the state for financial assistance and Illinois’ well-known fiscal problems have little impact on the county’s position.
Cook County chief financial officer Tariq Malhance said the borrowing is expected to result in total interest costs of under 5%, a level he’s pleased with.
Malhance said the bankers have told him to expect an Illinois penalty, but it is not clear how much it will cost.
“They do think there will be an impact,” he said in an interview Monday. “But it looked like they’re showing overall [costs] will be under 5%,” he said. “I am happy with that under these economic conditions and our [downgraded] ratings.”
Cook is struggling with its own negative headlines, as it heads to market in the wake of two downgrades and just weeks from unveiling a 2012 budget that needs to overcome a $315 million shortfall.
County officials have assembled a finance team made up of nearly all minority-owned and local firms. William Blair & Co. is senior manager and Cabrera Capital Markets LLC is co-senior. BMO Capital Markets, Goldman Sachs & Co., Loop Capital Markets, Mesirow Financial Inc., Melvin & Co. and Podesto & Co. round out the underwriting team.
Chapman and Cutler LLP and Sanchez Daniels & Hoffman LLP are co-bond counsel. A.C. Advisory Inc. is financial advisor.
The finance team began marketing the deal Tuesday and plans to hold a retail order period Wednesday, followed by institutional pricing Thursday.
The transaction is divided into four series, three of which are taxable, and all of which carry Cook County’s full faith and credit pledge. Series A, consisting of $240 million of tax-exempt bonds, and Series B, $128 million of taxable bonds, are both refundings. Series C consists of $125 million of taxable GOs, and Series D consists of $110 million of taxable 90-day notes.
The notes are due on Dec. 15 and are payable from property tax revenue the county will collect in November. The finance team said it expects strong investor interest in the notes, according to an investor conference call held last Friday.
The refunding will generate $25 million in net present-value savings over the life of the bonds. But the main reason for the refunding is to restructure some debt by delaying near-term debt payments to generate short-term budget relief.
“We will see almost $300 million in up-front relief,” Malhance said.
The deal will push off $85 million of payments due this year, $92 million in 2012, and $85 million in 2013.
Proceeds from the $125 million new-money bonds will be used to replenish the county’s depleted self-insurance fund.
The county is one of several Chicago-area issuers hitting the market over the next several weeks. Last week, the Chicago Park District priced $178 million, and the Chicago Board of Education next week will issue $400 million of new money. The city and state also will enter the market this fall.
Malhance said the county has been hoping to price the bonds for months, but was waiting for its 2010 annual audit to be released, which occurred in early September.
“Otherwise it could have happened three months ago,” he said.
During the conference call, the finance team pointed out distinctions between Cook County and the state. “The state of Illinois, their fiscal problems have minimal impact on the county,” said Andrea Gibson, the county’s budget director.
Gibson detailed the state’s fiscal ties to the county, the thorniest of which is processing Medicaid payments. The state is not allowed to withhold or delay the county’s share of sales tax. “So the state’s issues don’t have a significant impact on Cook County’s finances,” she told investors.
Moody’s Investors Service in June cut Cook County’s rating to Aa3 from Aa2. Fitch Ratings last week dropped it to AA-minus from AA and revised the outlook to negative. Moody’s downgrade came after the county released an auditing error that inflated the general fund by $90 million.
Analysts from both rating agencies cited several of the same concerns, including persistent revenue pressures in the face of the gradual rollback of an unpopular sales tax increase, looming pension payments, diminished reserves, and deficits in its massive health and hospital system, which accounts for a third of its budget.
Standard & Poor’s last week affirmed its AA rating and stable outlook.
Malhance said he thought the market had already absorbed the Moody’s downgrade, which came four months ago, while downplaying the importance of Fitch compared to the other two major agencies.
For at least one investor, the rating actions are overdue. “From our perspective, the ratings were too high for too long, and we view it as an A1 credit at this point,” said Michael Pietronico, chief executive of Miller Tabak Asset Management.
The county remains a strong credit despite its ties to Chicago and Illinois, Pietronico said. “The issues are well-known, but Cook County is still an investable credit,” he said, citing the area’s strong employment base and infrastructure as fundamental credit strengths.
He added that the Illinois connection could work well for investors. “That Illinois penalty could be a gift should the deal come cheap,” he said.
Some individual investors may still shy away from Cook County, according to Brad Reynolds, chief investment officer for LJPR LLC, a Michigan-based investment firm that caters largely to individual investors. “I tend to stay away from Illinois right now,” he said. “The overall thing is what individuals are comfortable with, and most retail investors, because of the news, don’t like to see California or Illinois in their portfolios.”
The borrowing will likely be Cook’s last for at least a year. The board has authorized it to borrow up to $295 million to finance a capital campaign through 2016. The county’s debt totals $3.5 billion, and annual debt service makes up 9% of the government’s overall budget, Malhance said.