Illinois sets new senior manager pool as it plots $2 billion in refunding and other possible deals.

CHICAGO – Illinois named 15 firms to the new senior manager underwriting pool it will use for negotiated bond sales over the next three years.

The firms were chosen this month based on their scores in a competitive selection process launched in July to update underwriting pools. The state notice becomes final on Monday.

The 15 are Barclays, Bank of America Merrill Lynch, Citi, Goldman Sachs, Jefferies, JPMorgan, Loop Capital Markets LLC, Morgan Stanley, Piper Jaffray, PNC Capital Markets, Ramirez, RBC Capital Markets, Siebert Cisneros Shank, Stifel Nicolaus & Co., and Well Fargo Securities.

Another five broker-dealers submitted their qualifications by the July 22 deadline but were not included in the pool. The RFQ had said the state intended to establish a pool of 15.

The state uses both competitive and negotiated sales on its general obligation and sales-tax backed borrowing with statutes requiring that at least 25% of annual GOs be sold competitively.

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."

In the past, the state has set a rotation of firms by lottery.

The state will draw from the pool to issue $2 billion of refunding debt authorized in stopgap budget legislation.

The legislation frees the refunding through fiscal 2017 of many decade-old structuring rules that state officials have complained stymie refundings.

An update on the timing of the refunding and any new money borrowing was not immediately available.

While the state's borrowing has plunged over the last two years as its 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.

The state has paid steep penalties to borrow, but benefits from low prevailing interest rates.

Illinois is the lowest-rated state and pays the greatest credit spread among states. On the state's most recent GO sale in June, it saw spreads of about 185 basis points to the MMD top-rated benchmark on its 10-year maturity. In contrast, its August sale of high-grade sales tax-backed paper saw 10-year yields land at 48 basis points over the Municipal Market Data's scale's triple-A yield.

Moody's Investors Service and S&P Global Ratings rate Illinois Baa2 and BBB-plus ratings after recent downgrades and assign a negative outlook. Fitch Ratings assigns a BBB-plus rating and has the credit on negative watch.

"If no progress is made on a full-year budget by next year, it would not be surprising to see additional rating downgrades by mid-2017," Nuveen wrote in a recent report comparing Chicago and Illinois. "Investors should be prepared for the political process in Illinois to remain volatile over the next six months and expect market moving headlines to continue."

The state also must deal with expiring letters of credit on $600 million of floating-rate debt. If the state fails to renew the LOCs that expire in late November, the bonds have a three-year term out at a higher rate, according to S&P.

Moody's recent cut puts Illinois one downgrade away from triggering termination events on five interest-rate swap agreements tied to the $600 million while the S&P cut puts it two notches away. The swaps are negatively valued at $155 million.

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