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Illinois Plans to Price $1B of GO BABs for Capital Program

CHICAGO — Moving to take full advantage of the taxable Build America Bond program, Illinois plans to sell as much as $1 billion of general obligation BABs over the next two weeks to raise funds for its $31 billion capital program.

The state will take competitive bids on $350 million of new-money GOs on March 11 in a sale made up of a $300 million taxable BAB series and a $56 million non-BAB taxable GO series. Firms must submit bids on both series. The bonds will mature serially between 2011 and 2035 with a make-whole call provision. Bidders have the option of converting up to five maturities to one or two term bonds.

First Southwest Co. is the financial adviser. Mayer Brown LLP is bond counsel.

Proceeds will finance school construction grants included in the capital budget approved last year by lawmakers. State debt statutes require Illinois to sell at least 25% of its issuance in any fiscal year competitively.

Illinois will then enter the market the following week with an additional $700 million of GO BABs, said state debt manager John Sinsheimer. William Blair & Co. is senior manager. First Southwest is advising. Proceeds will finance transportation, transit, commuter, and high-speed rail projects.

“All of the new debt was anticipated and we want to take full advantage of the BAB program,” Sinsheimer said. Illinois  last December issued its first BABs in a $1 billion deal.

It captured a true interest cost of 4.04% with the federal government’s direct-pay 35% interest subsidy factored into the cost for a savings roughly of 50 to 70 basis points over a tax-exempt sale.

“We expect about the same results,” Sinsheimer said. He added that he sees some value in the close timing of competitive and negotiated sales, but believes the benefits of comparing the interest rate results of each are limited, given market fluctuations.

Illinois anticipates additional new-money borrowing before the fiscal year ends June 30, and with a backlog of $5 billion in bills owed, Gov. Pat Quinn hopes to issue additional short-term certificates. The state is facing repayment of $1 billion of certificates in May and another $1.25 billion in June.

Next week’s sale will come one day after Quinn unveils his proposed budget for fiscal 2011. Illinois is facing a nearly $13 billion deficit — including a $5.7 billion shortfall in the current $54 billion budget — due to declining tax revenue, bills that were carried over from the previous fiscal year, the notes coming due, and increasing debt and pension payments.

The preliminary offering statement said: “The current expectation is that the fiscal 2010 deficit will be financed by a combination of new borrowings and an anticipated increase in budget basis accounts payable.”

Quinn is expected to press lawmakers to support a mix of tax increases and spending cuts to close the two-year gap.

Rating agencies are watching to see how the state balances its books. Its $23 billion of outstanding GOs are rating A by Fitch Ratings, which has the credit on negative watch; A2 by Moody’s Investors Service, which assigns a negative outlook; and A-plus by Standard & Poor’s, which also assigns a negative outlook.

A new report prepared by Moody’s Econony.com for the Commission on Government Forecasting and Accountability predicts economic conditions will improve through 2010, but at a slower pace than the national rate because of state demographic trends and a concentration of slow growing and secularly declining industries.

The report says the state will benefit from an anticipated rebounding of both residential and nonresidential construction, capital goods manufacturers will benefit from an anticipated increase in investment spending, and pent-up consumer demand will boost spending.

The commission will discuss an updated revenue forecast for fiscal 2010 and 2011 at a meeting March 16.

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