CHICAGO — Illinois will soon begin remarketing $600 million of variable-rate paper from a 2003 issue that will be backed with fresh letters of credit from six banks to replace an expired liquidity facility from Depfa Bank plc.
The state expects to close on the new LOCs next week. Moody's Investors Service and Standard & Poor's will rate the paper.
Moody's assigned preliminary ratings in a report Tuesday applying a joint default analysis based on the individual bank's rating, the state' full faith and credit pledge, and the structure and legal protections.
The short-and-long term ratings of the six banks participating in the syndicate range from a low of A2 to a high of Aa3 and all carry a short-term rating of P-1. The syndicate is led by JPMorgan Chase Bank NA with other members including PNC Bank NA, Wells Fargo Bank NA, State Street Bank & Trust Co., Royal Bank of Canada, and Northern Trust Co. Barclays Capital Inc. will act as remarketing agent.
"In these cases, Moody's has determined that there is a low level of default dependence," analysts said. The various series will be rated on the low end at Aa3 and on the high end at Aa1. They will carry short-term marks of VMIG-1.
The letters of credit will run for three years. The bonds are currently remarketed weekly and carry a Moody's rating of A3. The paper will continue to be remarketed weekly but the mode could be changed. The bonds mature in 2033 and at the time of the original issuance the state entered into five separate swaps bearing a fixed rate of 3.89%.
The state will pay about 2.55% on the variable-rate bonds when the interest rate and LOC cost are added up, or about 18 basis points more than the state currently pays. The direct-pay LOCs come at a cost of 235 basis points but with the stronger ratings from the LOC support the bonds will trade at the Securities Industry and Financial Markets Association index rate. While the Depfa facility was significantly less expensive, the bonds were paying a much higher a rate.
"We are getting it done at an attractive rate," said state capital markets director John Sinsheimer. "We are getting a very good deal for the state."
The high LOC costs reflect the compression of the LOC market since the 2008 financial crisis and the state's steep credit deterioration. In 2003, the state carried ratings in the double-A category. It's now the weakest rated state at the low-single A level with a negative outlook.
The JPMorgan-led syndicate was the only bid that covered the full $600 million. Another bank submitted a partial bid but then dropped out over its own credit issues. One member of the syndicate also dropped out but another bank then stepped in to cover the void.
A market participant said some individual banks might have offered a lower rate but given the state's credit ratings and the fact there was a lone bid to cover the full amount, the LOC pricing reflects market rates. Banks also face tougher internal credit standards in their ability to offer credit support.
The state continues to review whether it needs to return to the market before the end of the year for more new money bonds in what Sinsheimer has described as a "cleanup" issue for ongoing project needs.
The state also is reviewing proposals from underwriters, financial advisors, and law firms submitted earlier this month to establish updated finance team pools. Sinsheimer said the state hopes to announce the new qualified pools by the end of the year.
