CHICAGO — Illinois wrapped up its election of new underwriting, financial advisory and bond counsel pools this week, significantly expanding to 25 the number of firms qualified to serve in the top spot on the state’s negotiated sales while narrowing its bond counsel to one: Mayer Brown.
The choices follow a request-for-proposals process based on a scoring system launched in July for a new two-year term. The procurement office on Friday posted the 25 firms qualified to serve as senior managers, up from 10 in the last pool.
Another seven firms were entered into the co-senior manager pool and nine more are on the co-manager list.
Unlike some RFPs in which firms apply for a specific role, broker-dealers were placed in their respective pools based on their score on questions involving their national and local experience, capital capacity, professionals, and ideas.
Overall, the state received 48 bidders and disqualified seven. Two bids were jointly offered, bolstering the total number of firms qualified to work on Illinois deals to 43 from the 33 approved in the last RFP process.
A three-member team of state officials scored the firms.
The senior manager list spans the distance from Wall Street to local and regional borders and includes minority and women-owned firms.
“The firms all scored high in their demonstration of knowledge of the state’s general obligation bond act, the swaps market, and the state’s financial needs,” said Illinois debt manager John Sinsheimer. “It was a goal to expand the number of firms that the state works in a senior manager position.”
The state last year and early this year issued a series of large deals for more than $1 billion, but Sinsheimer said he has no concerns over the ability of any of the firms on the senior manager list to successfully market the state’s debt at the best interest rates.
To qualify for the top list, firms were required to show they had the capital to support a $400 million deal and Sinsheimer said he anticipates doing smaller offerings to fund a $31 billion capital program over the next two years with the full syndicate able to take down any bonds if needed.
“We are still sitting on cash from some of our past issues and so to avoid any negative arbitrage I expect to do smaller transactions,” he said.
The state’s next sale will skip the list as the first deal of a fiscal year must be sold competitively under legislatively imposed debt-management rules. Sinsheimer expects to sell a sales-tax backed issue this fall in the $200 million to $300 million range under the Build Illinois program.
Illinois has not yet exhausted its GO proceeds for capital from previous issues. Officials are also eyeing refunding opportunities and Sinsheimer expects to sell a total of $2 billion to $3 billion of new-money debt to support the capital program in the current fiscal year.
The state will hold a public drawing led by the Illinois Lottery’s Linda Kollmeyer — known in the state as the “lottery lady” for her role announcing winning numbers on TV — to set the rotation lists of underwriters, financial advisors and underwriters counsel.
All qualified vendors are encouraged to attend the drawing on Wednesday, Sept. 21, at 1:30 PM Central Time at the James R. Thompson Center at 100 W. Randolph Street in Chicago.
“We are doing the rotation list publicly so that bankers can come in and observe the process,” Sinsheimer said. “We asked Linda Kollmeyer to come in and help us out as an impartial and impersonal person and thought we could have a little fun with it.”
The shift to one firm to serve in the dual role of bond counsel and disclosure counsel shook up the local legal community as the state has traditionally used a handful of firms on a rotation basis in that role.
A three-member team of state lawyers selected Mayer Brown from among 18 law firms that submitted proposals to work as bond and disclosure counsel. The state’s procurement office made its selection public Monday in an award notice posted on its IllinoisBID website.
“They received the top score,” Sinsheimer said.
The change stems from the increased scrutiny of municipal debt by the Securities and Exchange Commission and the Municipal Securities Rulemaking Board following the implementation of the Dodd-Frank financial reforms. The state wants to ensure consistency in the fiscal information provided in offering statements, roadshow presentations, and in public comments.
“The current structure of rotating bond counsel does not provide for the consistency required by disclosure requirements,” the RFP read.
Illinois last year hired Chapman and Cutler LLP to update its disclosure policies, and earlier this year expanded its pension disclosure in offering statements and reported an SEC probe of comments made regarding the impact of pension reform legislation.
Mayer Brown won out over 17 other firms that submitted bids. Mayer has led the pack of bond counsel on direct-state issues over the last decade, according to Thomson Reuters.
It has advised on five issues totaling $6.3 billion. Pugh Jones Johnson & Quandt follows with $5.6 billion, Kutak Rock LLP with $4.2 billion, Chapman with $3.2 billion, and Katten Muchin Rosenman LLP with $2.5 billion.
The new senior-manager pool retains the leading underwriters of state debt in the last decade: Citi led the pack among senior managers of state debt, working on nine deals valued at $5.3 billion, according to Thomson Reuters, followed by JPMorgan, Goldman, Sachs & Co., Loop Capital Markets LLC, and Morgan Stanley.
The state’s qualified list of six financial advisors are A. C. Advisory Inc., Acacia Financial Group, Peralta Garcia Solutions, Public Financial Management Group, Public Resources Advisory Group and Robert W. Baird & Co. They were selected from 10 applicants. Picks for underwriters counsel were not yet posted.
During the General Assembly’s fall veto session next month, Gov. Pat Quinn is expected to try to resurrect a proposal for new borrowing to restructure overdue bills.
The state currently has about $3.8 billion in unpaid bills carried over from the previous fiscal year.
Early in the year, Quinn won legislative support for an income tax hike that is expected to generate about $6.8 billion annually, but lawmakers refused to go along with a bond issue to cover the bill backlog.
After a series of downgrades, Illinois’ GO bonds are rated A1 by Moody’s Investors Service, A-plus by Standard & Poor’s and A by Fitch Ratings.
The state paid a penalty to borrow last year, given the headlines over its severe budget, cash flow and pension woes.
The “Illinois penalty” also continues to affect local issuers, even those with no exposure to the state’s delayed payments, which must pay an additional 20 to 50 basis points to borrow.
Quinn last week announced $313 million in budget cuts through the shuttering of seven state facilities and slashing 1,900 jobs. He pressed lawmakers to either increase spending in the $33 billion budget or reallocate funds to support the facilities.
Michael Brooks, a senior portfolio manager at Bernstein Global Wealth Management, slammed the governor’s comments, saying they might offset strides made this year to improve the state’s image in the investment community and lower its borrowing costs.
Brooks said the spread early this year of 250 basis points between five-year Illinois paper and triple-A rated debt has narrowed to 145 basis points in recognition of the state’s move to increase its income tax.
Sinsheimer said Quinn’s comments were directed specifically at the budgets for the various facilities being shuttered and not the overall budget.
The firms Illinois selected in the senior manager-bookrunner category include Barclays Capital, Bank of America Merrill Lynch, BMO Capital Markets, Cabrera Capital Markets LLC, Citi, Duncan Williams Inc. with Rice Financial Products, Goldman Sachs, Jefferies & Co. Inc., JP Morgan, Key Banc Capital Markets, Loop, Mesirow Financial Inc., Morgan Keegan & Co. Inc., and Morgan Stanley.
The list also includes Oppenheimer & Co. Inc., Piper Jaffray & Co., PNC Capital Markets LLC, Ramirez & Co. Inc. with US Bank, Raymond James & Associates Inc., RBC Capital Markets, Robert W. Baird & Co. Inc., Siebert Bradford Shank & Co. LLC, Stifel, Nicolaus & Co Inc., Wells Fargo Securities, and William Blair & Co.
Unsuccessful applicants for the bond counsel role are: Burke Burns and Pinelli Ltd., Chapman and Cutler, Drinker Biddle, Foley and Lardner LLP, Herbert Hardwick, Ice Miller LLP, Katten Muchin Rosenman, Kutak Rock, McGaugh Law Group, Nixon Peabody LLP, Peck Shaffer & Williams LLP, Perkins Coie LLP, Pugh Jones, Quarles and Brady LLP, Reyes Bonoma Kurson, Sanchez Daniels & Hoffman LLP, and Shanahan and Shanahan LLP.
