CHICAGO - With the Internal Revenue Service's heightened scrutiny of several sectors, the Illinois Development Finance Authority is reviewing how it records and reports information and is taking another look at the stringent indemnity clause it requires underwriters to sign.
The review is taking place at the same time that inclusion of the indemnification language in the bond purchase agreement prompted Goldman Sachs & Co. to pull out as underwriter of a $50 million series of auction-rate securities for Evanston Northwestern Healthcare Corp. The firm will maintain its role as re-marketing agent, according to the hospital system's chief financial officer, Harry Jones.
Some language that legally protects a conduit issuer from information included in the official statements not directly related to the agency is common. But the clause IDFA has included in its deals since 1998 is exceptional in that it extends the protection to all information disclosed in the bond documents.
Patrick Rea, executive director of IDFA, said the clause is just one in a series of procedures being examined. "This is really being driven by the Internal Revenue Service," he said in an interview this week. "We want to be good partners in the governmental process and responsive to the capital markets."
Balancing the two is not that simple. Most underwriters have signed off on the clause, but Goldman is one firm that has long refused, according to market participants. William "Bo" Daniels, who is both the manager of Goldman's Chicago office and a member of the IDFA board, did not return calls made by The Bond Buyer yesterday.
Rea said a revised clause could end up even tougher, but at the same time he said the authority is cognizant of current objections. "It may well turn out that the indemnity clause will be tighter, but in the review we don't want to do something that takes major Illinois market players out of the market," he said.
The review also includes how the authority records, files, and maintains its records. Rea said in the case of an IRS audit, he doesn't want to rely on trust departments that undergo frequent mergers to provide the agency needed information. Rea said the authority will work with other conduits, market participants, and state officials such as the Bureau of the Budget to decide what changes may be needed.
Evanston Northwestern Healthcare's $230 million transaction wasn't supposed to be so complicated. It initially was up before the Illinois Health Facilities Authority, but the agency declined to approve the sale in what some sources viewed as a challenge to Gov. George Ryan's failed proposal to fold most conduit agencies into one.
The system turned to IDFA, and that's where the conflict arose. The issue was recently resolved by moving Banc One Capital Markets Inc. into the underwriting position on $50 million of auction-rate securities that will price June 26. Banc One was the underwriter on a $130 million piece that priced last week and on another $50 million series that will price July 2.
Banc One will place auction-rate securities with Goldman, which then will act as the remarketing agent. Goldman is one of a handful of investment banks that offers the auction-rate structure. The securities attract a different investor audience than typical variable-rate paper and allow a borrower to forgo a liquidity provider.
The change in underwriters did not impact the deal, according to Jones. "The end result to us is no different," Jones said. Banc One's lead banker on the deal, Brian McGough, did not return phone calls to comment on the changes to the transaction.
