Illinois Finance Authority sets second green state revolving fund deal

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The Illinois Finance Authority signed off Tuesday on an up to $500 million state revolving fund deal that offers triple-A ratings with the state’s name.

The borrowing allows the state to keep moving forward with its clean water initiative and will mark the second SRF financing to carry the green designation. In contrast, the state carries general obligation ratings at the triple-B-minus level, the lowest rung of investment grade.

Metropolitan Water Reclamation District construction at the Melvina Ditch Reservoir in Burbank, Illinois. THE MWRD is the largest borrower through Illinois' state revolving fund.

IFA executive director Chris Meister said the 2019 deal benefitted from the green label because it drew new investors and greater retail participation but the authority couldn’t put a dollar amount on the economic benefit through interest rate savings. The authority is raising the bar in the upcoming sale.

The IFA did not seek external verification of the green status of the 2019 deal.

The IFA pledged to adhere to the International Capital Markets Association’s Green Bond Principles, which lay out voluntary guidelines on what use of proceeds qualify, a process for project evaluation, management of proceeds, and reporting requirements. It pledged to issue an annual green bond report.

Meister said no decision has been made about how to verify the green status of the upcoming bonds with input being sought from the financing team.

“We are looking to the team to come up with ideas that will allow for the best execution that effectively underscores for the market” the benefits of the green/sustainable label, Meister said.

The IFA named Citi as the lead manager. Ramirez & Co. is the co-senior. Academy Securities Inc., Cabrera Capital Markets LLC, Janney Montgomery Scott LLC, Loop Capital Markets LLC and Mesirow Financial Inc. are co-managers. Acacia Financial Group Inc. is the advisor and Katten Muchin Rosenman LLP is bond counsel.

The IFA received $300 million in retail orders for the $450 million 2019 deal, compared to $210 million on its $560 million 2017 deal. A 10-year bond in the deal paid a yield of 2.16% with a 5% coupon, a 24 basis point spread to the Municipal Market Data’s AAA benchmark. A 20-year term bond with a 5% coupon paid a yield of 2.83%, a 31 basis point spread to the AAA.

Meister said the authority is aiming to sell before the end of the year with the timing driven by loan demand although it could delay the sale if market conditions sour.

The clean water loan program dates back to 1988 but it was revamped and expanded with a new master trust in 2013. The upcoming deal will mark the fifth transaction under the new indenture. About $1.4 billion is outstanding from the $1.6 billion borrowed.

Proceeds fund low-cost loans managed by the Illinois Environmental Protection Agency to local government entities. In some cases, the state uses proceeds to cover the matching funds needed for federal funding although the IEPA is currently planning to tap appropriated state capital budget dollars to meet the matching fund requirement in the next 12 months.

“The positive benefits of the SRF are tangible and measurable: clean water at a lower cost. Local Illinois taxpayers and ratepayers benefit from reduced financing costs — lower interest rates and transaction costs,” IFA said.

The IEPA’ clean water plan for fiscal 2021 identifies $1.9 billion of eligible projects on its priority list with about $700 million in available funding. The IEPA’s safe drinking water plan has identified $1 billion in projects on a priority list with about $350 million in available funds.

Fitch Ratings and S&P Global Ratings affirmed their AAA ratings on the SRF bond program ahead of the 2019 deal.

The clean water and drinking water funds are cross-collateralized providing for over-collateralization and to date there have been no pledged loan defaults in any of the IEPA state revolving fund programs. “With this issue, the total program size will be expanded which, in turn, will lead to improved diversity,” Fitch said in last year’s report.

The 10 borrowers with the largest outstanding loans accounted for 57% of the total outstanding balances of pledged loans. The Metropolitan Water Reclamation District of Greater Chicago last year was the largest participant, with $686 million in loans outstanding, about 21.4% of the pool. MWRD carries double-A to triple-A ratings. Chicago was second with a $630 million loan balance that accounts for 19.7% of total loans.

The IFA board also signed off on amendments to existing bond documents that pave the way for Palos Health to join the obligated group of Chicago-based Northwestern Memorial HealthCare. The two announced in September they were exploring an affiliation subject to due diligence and state and federal regulatory approval. The two did not announce debt-related plans at the time.

A final agreement by the independent, south suburban-based Palos and Northwestern has not yet been announced but the amendments smooth the way should the deal be finalized.

A merger would give Palos, a community-based independent system, access to a prestigious system that often captures top health care rankings. Northwestern would benefit by broadening its reach into the south suburbs. Northwestern operates 10 acute care, rehabilitation, and behavioral hospitals in Chicago, the northern, northwest and western suburbs.

Northwestern’s flagship is in downtown Chicago and Palos Health operates its main hospital in Palos Heights with another campus in Orland Park. Palos recorded $394 million in total operating revenues in fiscal 2019. Northwestern recorded $6 billion of revenues for fiscal 2019.

Palos carries a Fitch's AA-minus rating. It has $340 million of debt.

Northwestern carries ratings in the double-A category. The system had $1.75 billion of long term debt at the close of fiscal 2019. Northwestern acquired Centegra Health System in 2018, expanding its holdings by three hospitals.

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