Illinois puts the word out to underwriters

BY SourceMedia | MUNICIPAL | 01/13/20 01:38 PM EST By Yvette Shields

Underwriters interesting in working on Illinois’ negotiated deals as the state ramps up borrowing for a $45 billion capital program have until Jan. 23 to submit their qualifications for updated broker-dealer pools.

The Governor’s Office of Management and Budget “is seeking to qualify a list of financial institutions to act as underwriters for its bond issues and other capital markets and debt management initiatives,” reads the RFQ.


The state will establish two sets of pools, one for senior managers/bookrunners/co-seniors and a second for co-managers. The state expects to choose up to 15 firms for inclusion in the senior pool and up to 15 firms for the co-manager pool.

Firms applying for senior manager will also be considered for the co-manager pool and “the firms selected for the senior manager pool will also have the opportunity to serve as co-senior managers,” the RFQ says.

The initial term will run for four years with the potential to renew the term for a total of up to 10 years.

The current RFQ expired last September but Gov. J.B. Pritzker’s administration extended the term for six months as permitted under the procurement process. While the process is managed under state procurement rules, the new pools allow the governor’s administration to put its stamp on the state’s banker relationships as Pritzker hits his first anniversary in office.

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 GOs be sold competitively in a fiscal year.

As Illinois pays the widest spread penalty among states for its status as the lowest rated state, the mixed sale types have helped the state keep borrowing costs in check. That’s because underwriters have incentive to submit highly competitive bids in hopes of gaining the administration’s favor in the selection of teams for negotiated issuance.

Bidding on competitive Illinois deals is also a factor in the RFQ and deal selection.

“GOMB 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, other value-added services, and GOMB’s regional, minority, women, and veteran owned firm participation goals,” says the RFQ.

Spreads on Illinois maturities 10 to 25 years out are at a 155 basis points to the Municipal Market Data’s top benchmark.

State capital borrowing tapered off in recent years although Illinois did sell $6 billion of bonds to pay down its bill backlog in 2017.

Capital borrowing is expected to pick up under the six-year, $45 billion Rebuild Illinois capital program passed last spring. It authorized $22.6 billion of new money borrowing under the state’s GO credit and sales tax-backed Build Illinois program.

The state this fiscal year will sell about $1.2 billion of bill backlog GO bonds.

“We are continuing to work with the Comptroller’s Office on the need. We’ll revisit as the need arises,” GOMB spokeswoman Carole Knowles said in an email. Comptroller Susana Mendoza manages bill payment and the backlog currently stands at $6.4 billion. “We would expect to do a capital offering sometime in the spring but it hasn’t been determined yet,” Knowles said.

“Please describe how the state might strategically issue this new debt (timing, sizing, etc.) and any key considerations, including investor relations, to be best positioned going forward,” the RFQ asks.

The RFQ also asks for recommendations of up to two state-level statutory changes that would benefit the state with regard to its debt and to discuss a firm’s experience in developing new credits and key points of consideration in developing new bonding structures.

The RFQ also asks underwriters to disclose whether the firm has participated in credit default swap market-making activities related to any state of Illinois credit default swaps within the last year.

The state is now using BidBuy, a new electronic procurement system. With the implementation of BidBuy, some procurement processes have changed, the RFQ notes.

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.

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