State of Illinois
Counties of Cook, DuPage, Kane, Lake, McHenry and Will
REGIONAL TRANSPORTATION AUTHORITY
SUBORDINATE WORKING CASH NOTES, SERIES 2017B
In 2017 Estrada Hinojosa was selected as Financial Advisor to the Regional Transportation Authority (RTA)’s issuance of Working Cash Notes. The direct placement required Estrada Hinojosa to engage in bank outreach, prepare a “Commitment to Purchase” RFP and Term Sheet, evaluate the responses, select a bank and negotiate the term sheet.
Background: At the time of issuance, the State of Illinois owed the RTA approximately $458 million. In recent years the State had been late making payments so the Authority began using its short-term borrowing authority, including the Subordinate Notes, to cover these payment delays.
Structure of the Notes: The Subordinate Notes are short-term obligations, which provide the RTA the ability to draw up to a cap of $250 million. The Subordinate Notes are drawdown notes and contain a revolving feature allowing for repayment and borrowing on an ongoing basis. The drawdowns on the Subordinate Notes are to be made in increments over time as needed. The revolving function of the Subordinate Notes allows the RTA to reduce its borrowing should the State become more current. The revolving drawdown feature of the Subordinate Notes also provides the Authority with the flexibility to structure its future debt based on cash needs and lowest cost.
Bank Selection: Upon engagement, Estrada Hinojosa began bank outreach to large institutions that could purchase the entire $250 million issue.
Term Sheet and Rating Implications: One of the key issues for the RTA was the change in rates/premiums under a downgrade. In June of 2017, Moody’s had downgraded the RTA from Aa3 to A2 with a Negative Outlook based on issues at the State level with regards to passing a balanced budget and payment deferrals as well as pension challenges and credit downgrades for Chicago area credits, the RTA’s economic base.
To protect the RTA from further increases in rates due to a Single rating agency action, Estrada Hinojosa suggested language that would require changes in ratings from multiple agencies before increases would take place.
In addition, we worked with the purchaser, to smooth the repayment requirements so that the RTA would not have to come up with a lump sum repayments.
Results: The purchaser, who had been the holder of the 2016 Notes was again selected for the 2017 Notes. Not only was their proposal the winning bid, but it was also the most flexible. The terms were increasingly favorable to the RTA. The final placement had protections and flexibility in place that would allow the RTA to utilize the Notes without penalties or complexities.