CHICAGO — Michigan starts the week off with a three-day pricing of a $3.3 billion unemployment-obligation assessment revenue bond issue in the largest deal of the year so far.
Proceeds will be used to defease $3 billion of short-term debt the state rushed to market in late December to pay off its federal unemployment insurance liability without incurring new penalties by rolling it over into the new year.
The big three raters awarded triple-A ratings to the bonds ahead of the deal.
The debt is secured by a first lien on a new special tax assessment levied on all of the state’s employers. The Michigan treasurer has the ability to set the assessment rate, and has pledged to set it to provide at least a 1.5 times debt-service coverage level, plus enough for administrative costs and a liquidity reserve fund.
The state cannot use the new assessment revenue for anything but the debt payments on the bonds.
The Michigan Finance Authority is issuing the bonds on behalf of the state.
Citi and Bank of America Merrill Lynch are the senior book-running managers on the deal. Citi is set to hold a retail order period Monday for the $1.47 billion Series A, followed by institutional orders Tuesday. Bank of America will have a retail period also Monday on the $1.3 billion Series B and open it up to institutional buyers Wednesday.
The transaction also includes $250 million of variable-rate bonds that will be backed by a letter of credit from Citi.
In addition to paying off the short-term bonds, proceeds will be used to fund a $75 million liquidity reserve.
The bonds feature a final 12-year maturity, but $1.5 billion of debt — Series B and C — will be subject to early redemption after nine years, assuming adequate excess revenue.
“The triple-A rating reflects the security provided by the obligation assessment, a legislatively authorized tax payable by contributing Michigan employers exclusively for bond repayment,” Fitch Ratings analyst Douglas Offerman wrote in a rating report on the deal.
Standard & Poor’s noted the state’s diverse employer base that includes 200,000 businesses, the first lien on the pledged revenue and the 1.5 times debt service covenant.
Gov. Rick Snyder and the state treasurer last week sent out a press releasing touting the bonds’ triple-A ratings. “The bondholders will benefit from a strong credit structure, which has several features that provide a high level of security,” said Treasury spokesman Terry Stanton.
For one institutional investor who is considering buying the bonds, the high ratings could end up being less important than the need to limit exposure to Michigan.
“Generally, we watch our overall Michigan exposure very closely, just like any other problem state like Illinois or California,” said the investor, who asked to remain anonymous. “We have macro exposure constraints for individual states.”
Michigan was only the third state, after Texas and Idaho, to issue bonds to repay federal loans for jobless benefits. Other states are eying the option. Illinois expects to price between $1.7 billion to $2 billion in July, and the Pennsylvania House last week passed a bill allowing the state to issue up to $4.5 billion to pay off its debt.
Michigan officials estimate the state will save $250 million by paying municipal market interest rates instead of the rate charged by the federal government for maintaining the unemployment trust fund loans. The current federal rate is 2.943%, though it can go much higher, and last year reached 4.1%.
Co-seniors are Barclays Capital, JPMorgan, Loop Capital Markets, Wells Fargo and eight additional firms are co-managers. Robert W. Baird & Co., the state’s long-term financial advisor, and First Southwest Co., which was FA on a similarly structured Texas unemployment deal, are co-financial advisors.
