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Moody’s Downgrades Illinois as State Eyes $3B of Deals

CHICAGO — Moody’s Investors Service Friday downgraded Illinois’s general obligation debt to A1 from Aa3, saying infighting among the state’s leaders has led to ongoing budget delays, erosion of finances, and a severe pension funding gap.

The downgrade comes a week after Illinois lawmakers completed a $52 billion fiscal 2011 budget that relies heavily on one-time maneuvers to chip away at a $13 billion deficit, and as officials plan to come to market with several deals over the next few months.

Moody’s also lowered its rating on the state’s Metropolitan Pier and Exposition Authority debt to A2 from A1, and on Build Illinois sales-tax revenue bonds to A1 from A3. The outlook on all the state’s debt is revised to stable at the lower rating.

Illinois is rated A-plus by Standard & Poor’s and Fitch Ratings. Both agencies have the state on negative watch.

The 2011 budget, which leaves a $3.7 billion shortfall tied to the state’s next pension payment, aggravates an already anemic fiscal position, Moody’s said. The failure to enact recurring measures “underscores a chronic lack of political will,” Moody’s said in a report on the downgrade.

State officials met with all rating agencies last week to discuss the budget and as they plan to head to market with three deals over the next three weeks followed by a handful of planned deals over the next few months.

On tap this month are a pair of Build America Bond issues totaling to totaling $1.2 billion and $500 million of Build Illinois restructuring bonds.

Gov. Pat Quinn also hopes to borrow up to $1.3 billion of short-term notes in July to meet cash-flow needs. The deal still needs to be approved by the state controller and the state treasurer.

On June 15, the state will price $500 million of junior-lien, sales-tax backed Build Illinois bonds. The transaction will refinance senior-lien debt into junior-lien, sales-tax backed Build Illinois bonds that have the same rating as the senior debt to achieve savings. Cabrera Capital Markets LLC is senior manager for the deal, which is set to price June 15.

It is Illinois’ first junior-lien deal and will save roughly $30 million in interest costs over the next 10 years, said state debt manager John Sinsheimer. The refinancing will give the financially struggling state access to another $25 million that is currently in a debt service reserve fund for the senior-lien debt. The junior-lien bonds do not require a reserve fund. 

The bonds are rated AA-plus by Fitch and AAA by Standard & Poor’s. The ratings reflect the high coverage levels on the debt, analysts said.

On June 17 it will price $300 million of taxable BABs in a competitively priced sale. On June 30, the state will enter the market again with $900 million of BABs. Citi is the senior manager on the transaction. After the sales, Illinois will have sold roughly $5.1 billion of BABs.

Illinois officials are eyeing the autumn to enter the market with around $1.4 billion of 17-year bonds backed by its share of tobacco settlement payments, Sinsheimer said.

The sale would securitize about 40% of the state’s total tobacco settlement revenues. The transaction would net roughly $1.2 billion for the general fund. The state plans to issue a request for proposals for underwriters but the RFP’s timeline is still uncertain, Sinsheimer said.

Meanwhile, the Quinn administration continues to wait for the Senate to reconvene to vote on the governor’s proposal to issue $3.7 billion of eight-year general obligation bonds to fund pension payments and fill the budget gap. The Democratic-controlled House narrowly approved the borrowing last week.

If approved, the state needs to sell the pension bonds by Sept. 30, Sinsheimer said.

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