CHICAGO — Illinois' arrangement to directly place $600 million of existing floating-rate debt with four banks received a positive review from Moody's Investors Service.
"The agreement is positive for the state, which otherwise faced accelerated maturity of the debt under the terms of existing letters of credit," Moody's wrote in its weekly credit outlook distributed Monday.
The state is rated Baa2 with a negative outlook. The Moody's commentary doesn't affect the rating.
"Failure to either renew or replace these agreements before then would have precipitated a three-year amortization of debt originally set to mature in 2033," Moody's wrote.
Illinois, which priced a $1.3 billion general obligation bond refunding issue Thursday, has delayed a $480 competitive new-money deal that was expected this week. It had said in investor presentations for the refunding that the timing of the competitive follow-up was subject to change.
Gov. Bruce Rauner's administration said Monday the new money deal is expected to now sell in November. It did not give a reason for the timing change but market participants said it made sense given the heavy slate of supply on the calendar. It also allows the market time to digest the state's first billion-dollar sale since early 2014.
Illinois paid higher yield penalties on the refunding deal amid a tide of negative fiscal and market headwinds. The state's 10-year maturity landed at a yield of 3.63% with a 5% coupon, 193 basis points more than the top-rated Municipal Market benchmark. The state's spread in June on its 10-year was 185 basis points and in January it was 155 basis points while recent trading was at 160 to 175 basis points.
The state is expected to complete the floating-rate direct placement by Nov. 7 ahead of the Nov. 27 expiration of existing letters of credit on the 2003 bonds. The banks will hold the bonds for two years.
The state said it would not disclose the banks' names until closing but Moody's said the institutions are among the six that current provide liquidity support. The current LOCs are provided by JPMorgan Chase, PNC Bank, Wells Fargo Bank, State Street Bank, Royal Bank of Canada, and Northern Trust.
The $600 million represents the only floating-rate risk in the state's $26 billion GO portfolio but the accelerated payments — especially the $360 million payment due in the third year — would have pressured the state's already strained balance sheet.
The state's backlog of unpaid bills hit $9.37 billion this week amid an ongoing budget impasse that has stalled passage of full year budgets for fiscal 2016 and 2017. The Republican governor and Democratic controller General Assembly face a $5.4 billion deficit when they resume budget negotiations as planned early next year.
"The liquidity required to meet these payments would have been large relative to the state's current available operating fund cash," Moody's said. "Illinois' general funds cash balance as of 30 June 2016 fell to $246 million from $621 million a year earlier."
The carrying cost of Illinois' variable-rate debt is currently about 6.8%, including LOC and remarketing fees and related interest rate swap agreements, Moody's said. The bank facility expense increased because the state was downgraded to Baa2 in June compared to its A3 rating in 2013 when the LOCs were executed.
The annual cost under the existing letters of credit is 2.85% and would have risen to 3.35% if the state were downgraded to Baa3 and up to 5.35% if the state lost its investment grade rating.
"The exact cost remains to be determined, and would still rise in the event of subsequent credit downgrades," Moody's said.
Moody's also noted the easing of swap termination pressures following the state's recent restructuring of swaps tied to the floating-rate paper. The restructuring lowers the threshold at which termination events are triggered. After recent downgrades, the state was nearing a potential trigger. The swaps are negatively valued at $153 million.
"Illinois still faces the task of extricating itself from the swaps before the two-year agreement with the letter-of-credit banks ends," Moody's wrote. One option — replacing the debt and paying the swap termination costs with bond proceeds — would require legislative approval.
The Rauner administration disclosed the swap restructurings and novations in the offering statement on its $1.3 billion GO sale. A supplement posted just ahead of the refunding sale disclosed the direct placement deal.
S&P Global Ratings downgraded Illinois ahead of last week's sale to BBB, leaving its outlook at negative. Fitch Ratings affirmed its BBB-plus rating and left the credit on negative watch. Fitch will resolve the placement in January after lawmakers return for a post-election, lame-duck session to tackle a budget plan and pension reforms.
