State of Illinois, Series of June 2013

State of Illinois
$1,300,000,000
General Obligation Bonds, Series of June 2013

A successful roadshow presentation helped create a huge demand for this $1.3 billion general obligation bond deal.

Siebert Brandford Shank served as joint senior manager for this issue in June 2013. Initially, the State planned to bring the transaction to market only if the state legislature passed a pension reform bill to address the State’s nearly $100 billion unfunded pension liability, without which reform the State would face a severe budgetary impact in coming fiscal years. The General Assembly failed to pass the reform legislation and in response, the rating agencies downgraded Illinois to the lowest state ratings in the country (A3/A-/A-).

Funding was critically required for the redevelopment of the Red Line, Chicago’s oldest Rapid Transit line­—relied upon by 80,000 daily commuters. Financing was also needed to fund road repairs, new Metra facilities, schools and school repairs, new state university buildings and other key projects. Our firm and two other joint senior managers committed to the State that we would stand behind the transaction.

Siebert Brandford Shank assumed the lead role in preparing the investor presentation. We recommended a comprehensive investor strategy designed to refocus buyers on the fundamental credit strengths of the bonds. We worked closely with the State’s Director of Capital Markets to develop an investor presentation that underscored the State’s sovereign powers, the improving economy, and the strong legal protections of the State’s G.O. Bond Act. The presentation was used at each of the several one-on-one investor meetings, investor luncheons, sales force teach-ins, conference calls and the internet road show. The June 17 roadshow launch included meetings in Boston, Los Angeles, San Francisco, Chicago and New York and was attended by 170 buyers.

Going into the roadshow, the joint senior managers had market reads for the deal in the range from +185 to +210 basis points (bps) to MMD for the long maturities. On June 19, the markets reacted swiftly to commentary that the Fed would begin “tapering” its quantitative easing program. Over the week and half period of the roadshow, the 25-year MMD, sold-off by 63 bps.

On June 26, the morning of pricing, GDP of 1.8% was released, missing expectations of 2.4%, which led to a rally in the bond market. With a firm tone in the market the joint senior managers recommended going into the order period with spreads that were 5 to 10 bps through the price talk the night before. Within thirty minutes of the order period, several of the maturities were over-subscribed. As more maturities became quickly oversubscribed, the market continued to stabilize and MMD yields fell as much as 16 bps. Within the first hour, the transaction was 7 times over-subscribed with over $9 billion in orders. The order period was shortened and the underwriters presented a re-pricing proposal reflecting an overall improvement in levels for the State by as much as 30 bps from the initial pre-marketing levels. The State achieved a spread to MMD of +160 bps on its longest maturity which compared quite favorably to the +145 bps it achieved on its April competitive transaction months prior to its Moody’s and Fitch downgrades.

The tremendous investor demand was attributable to a very successful roadshow which centered on investor access to the State’s Director of Capital Markets and the presentation materials. More than 116 investors participated in the transaction. Siebert Brandford Shank engaged 5 new investors who ultimately placed 18,000,000 orders.

Despite the unresolved pension issue and rating downgrades, the State achieved an attractive All-in TIC of 5.05% for 25-year level principal debt with a 13-year average life.