CHICAGO -- The first debt issue to provide financial aid to local governments affected by Midwest flooding is expected to be sold today by the Illinois Development Finance Authority.
The $15 million of taxable one-year local government flood relief funding notes will be priced by Lehman Brothers, the sole underwriter for the issue.
In July, Gov. Jim Edgar of Illinois unveiled the bonding plan for local governments along with several other measures to help public and private victims of the flooding along the Illinois and Mississippi rivers.
"Our big concern was that a lot of local governments have pressing needs now and we wanted to do this quickly to relieve some of the pressure on them," said Al Grosboll, executive assistant and flood response coordinator for the governor.
Illinois officials and underwriters said they believe the note issue will be the first debt issued in an of the states affected by the flooding.
The notes are backed by the local governments' share of state income tax revenues paid directly from the state to the trustee for the notes. The issue is rated SP-1-plus by Standard & Poor's Corp. and MIG-1 by Moody's Investors Service.
Paul Devine, vice president and assistant director of the Great Lakes region at Moody's, said the agency's highest short-term rating on the issue is "entirely based on the payment mechanism."
"From the word go, instead of paying the cities, the money goes right to the trustee," Devine s
Susan Ulinski, an associate director at Standard & Poor's, cited the 1.3 times debt service coverage on the notes as a reason for the SP-1 rating.
Bond proceeds will be made available to about 110 cities, towns, and counties in federally designated disaster areas, according to John Glennon, a managing director at Lehman Brothers. He said the money will be used for a variety of purposes, including leasing cleanup equipment, paying workers overtime, and repairing infrastructure.
Glennon said the debt issue is intended as a "stopgap" measure until federal disaster, insurance, and other funds are made available to the governments.
The note issue was approved last month by the development finance authority board. While the authority has authorization to issue up to $34 million of flood relief notes for local governments, municipalities identified only $15 million of needed funding so far, according to Joseph Derezinski, the authority's director of programs.
Future debt issues can be approved if governments request more funds, Derezinski said.
He added that the authority will be paying issuance and interest costs on the debt -- estimated at $400,000 to $700,000 -- out of its reserves.
The notes are being sold on a taxable basis because of the varied uses of the bond proceeds and Internal Revenue Service restrictions on using debt proceeds for working capital purposes, according to Bruce Bonjour, a partner at Altheimer & Gray, the bond counsel for the transaction.
Bonjour said that if the deal was sold on a tax-exempt basis, the local governments would have to show that they spent all other available funds before any of the proceeds were used for working capital purposes.
Derezinski also said that the authority plans to invest some of the proceeds of the sale to defray interest and issuance costs. He also said that selling the deal on a taxable basis will avoid any arbitrage problems.
Robert Bielinski, an associate in public finance at Lehman Brothers, said that institutional investors are expected to be the primary buyers of the notes. He said the issue is expected to close around Sept. 15.