CHICAGO — Michigan has set June 14 for the sale of $3.3 billion of bonds that the state will use to defease short-term debt issued in late December to pay off its federal unemployment liability.
The deal has earned a Aaa rating from Moody’s Investors Service.
The size of the deal could range from $2.9 billion to $3.31 billion, state debt officials said. The structure will offer a mix of variable-rate and fixed-rate paper.
Citi and Bank of America Merrill Lynch are co-book-running senior managers on the deal. Co-seniors are Barclays Capital, JPMorgan, Loop Capital Markets and Wells Fargo, and eight additional firms are acting as co-managers. Robert W. Baird & Co., the state’s long-term financial advisor, and First Southwest Co., which acted as FA on a similarly structured Texas unemployment deal, are co-financial advisors.
The debt will feature a final maturity of 12 years but the state expects to pay off most of it within nine years, assuming unemployment assessment collections are on track, according to Joseph Fielek, executive director of the Michigan Finance Authority, the state’s borrowing arm.
“We wanted a relatively short maturity, and we wanted to provide enough security but also have provisions [so] that if we have the collections we can pay them off early,” Fielek said.
Michigan was only the third state, after Texas and Idaho, to issue bonds to repay federal loans for unemployment benefits. Other states are eying the option, and Illinois expects to come to market in the next few months with its own deal.
Michigan officials estimate the state will save nearly $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%.
Michigan will save additional money by not paying the federal taxes that are imposed when a state carries an unemployment loan for an extended period of time.
The state rushed the $3.32 billion of variable-rate demand bonds to market in late December, just days after Gov. Rick Snyder and the MFA board approved the sale. It paid an interest rate of 0.24% on the variable-rate bonds, which were supported by a letter of credit from Citigroup. The bonds were two-year notes that mature in June 2014, though state debt officials always planned to refund it within the first six months of this year.
The bonds will be repaid with assessments that are being levied on Michigan’s employers in addition to their typical unemployment compensation taxes. The state treasurer has pledged to maintain a coverage level of 1.5 times annual debt service.
Moody’s said the deal’s strong security and ample coverage earned it the prized top rating.
Other strengths include the inability of the state to use the pledged revenues for other purposes, the closed lien on the pledged revenues, and the state’s pledge to set aside $35 million a year as a cushion against shortfalls or to redeem the debt that is callable, Moody’s said. A separate liquidity reserve of $75 million will also be maintained.
Standard & Poor’s and Fitch Ratings have not yet rated the bonds. With years of high unemployment, Michigan has not been able to cover unemployment benefits with its own trust fund since 2008.