Regional News

Illinois Set For $1.4B Refunding

CHICAGO — Illinois later this week will refund up to $1.4 billion of general obligation bonds in a deal that should provide some small but much-needed debt service savings as Gov. Pat Quinn and lawmakers move to begin addressing the state’s liquidity and budget crisis.

Morgan Stanley and Citi are joint book-running senior managers and PNC Capital Markets LLC and Siebert Brandford Shank & Co. are co-seniors. Scott Balice Strategies is financial adviser. Chapman and Cutler LLP and Shanahan & Shanahan LLP are co-bond counsel.

The transaction — with pricing planned for Thursday — is expected to generate about $30 million in savings in the current fiscal year and $28 million next year with additional present-value savings through 2025. The deal tentatively will refund bonds first sold between 1999 and 2002. The final maturity on the new bonds will not be longer than the final maturity on the bonds being refunded.

Ahead of the sale, all three rating agencies affirmed Illinois’ ratings on the deal and $23 billion of outstanding debt.

Fitch Ratings rates the cash-strapped state A and has the credit on negative watch. Moody’s Investors Service rates it A2 and Standard & Poor’s rates it A-plus, both with negative outlooks.

Analysts are watching closely to see how the state will now deal with its mounting backlog of bills, poor economic performance, and looming deficit of up to $13 billion going into fiscal 2011.

Illinois’ reliance on one-time measures to deal with past ­deficits, poor revenue collections, and refusal by legislators to grapple with structural budget problems has led to several rounds of downgrades.

“The negative watch reflects the magnitude and persistent nature of the state’s fiscal problems and will be resolved after an assessment of the extent to which the state addresses its funding imbalances in the context of the legislative session that begins in February, and the development of a budget for fiscal year 2011,” Fitch analysts wrote.

“The absence of recurring solutions in the next year to deal with the current budget challenges and begin to stabilize liquidity will likely result in a further downgrade of Illinois,” according to Standard & Poor’s.

“Failure to enact corrective fiscal measures in coming months will exacerbate the state’s structural gap going into fiscal 2011 and place downward pressure on the state’s ratings,” Moody’s warned.

Lawmakers put off in recent months dealing with the state’s fiscal problems until after the Feb. 2 primary.

Quinn won the Democratic nomination and has been meeting with legislative leaders to discuss solutions, including some form of tax increase. Last year he proposed raising the income tax to 4.5% from 3% but lawmakers balked.

Quinn will face one of two Republican state senators in the November election, either Bill Brady of Bloomington or Kirk Dillard of Hinsdale.

The results of the Republican primary were too narrow to establish a clear victor. Neither supports a tax hike.

Last week, Quinn signed legislation giving him an additional three weeks to craft a budget for the fiscal year that begins July 1. The governor had faced a deadline of this week, but the legislation extends the deadline to the second Wednesday in March.

The measure also requires the administration to post state revenue and expense information online by next week to allow for legislative and public comment.

Lawmakers also face pressure to act on pension reforms. The state’s pension account was funded at only a 51% ratio as of last June, a decline from 63% two years earlier.

If not for a shift to a five-year smoothing of investment results in the valuation, the funded ratio would stand at only 39% due to investment losses in fiscal 2009.

The bond refunding is the latest in a series of Illinois financings to hit the market this year. The state late last month sold $1 billion of taxable GO Build America bonds for capital projects and earlier in January sold $3.5 billion of GO notes to fund pension payments.

Illinois debt manager John Sinsheimer said recently the state is also planning an additional new money sale and is exploring a cash-flow issue before the fiscal year ends.

The planned sale of $400 million in qualified school construction bonds is on hold pending the outcome several bills introduced in Congress that could affect the program.



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