CHICAGO – Illinois intends to tap $6 billion in budgeted cash flow borrowing in a $1.5 billion competitive sale, followed quickly by a $4.5 billion negotiated sale, Gov. Bruce Rauner’s office announced Friday.

Both series are expected to go to market in October and close in mid-November, providing much-needed relief on a backlog that grew to a record peak of $16 billion earlier this week. On Friday, it stood at $15.5 billion.

Illinois Gov. Bruce Rauner
Illinois Gov. Bruce Rauner's administration announced more details Friday on plans to sell $6 billion of bonds to bring down the state's bill backlog.

“Governor Rauner agreed to sell the bonds to provide relief to vendors with unpaid bills, some of whom have carried the state’s debt for over two years,” the administration said in a statement announcing its plans and team for the negotiated sale.

“Nearly two-thirds of the bill backlog is accruing late payment interest at the annual statutory rate of up to 12%. The bonds will enable the state to finance the state’s obligations at a more favorable rate,” it continued.

On the negotiated sale, the joint senior managers named are Barclays Capital, Bank of America Merrill Lynch, Citi, JP Morgan, Loop Capital Markets, and Siebert Cisneros Shank & Co.

The co-senior managers are RBC Capital Markets, Piper Jaffray & Co., PNC Capital Markets, Ramirez & Co., and Stifel, Nicolaus & Co.

The co-managers are Academy Securities, Backstrom McCarley Berry & Co., Blaylock Van, Cabrera Capital Markets, Estrada Hinojosa & Company, George K. Baum & Company, IFS Securities, Mesirow Financial, Mischler Financial Group, Raymond James, Rice Financial, Stern Brothers, and U.S. Bancorp.

Chapman and Cutler LLP is bond and disclosure counsel with Burke Burns & Pinelli, Ltd. and Charity & Associates, PC as co-bond counsel. PFM Financial Advisors LLC and Public Resources Advisory Group will advise the state.

The firms are drawn from the state’s previously qualified pools. “The team my office has selected is highly qualified, experienced, diverse, and includes firms in national and regional financial sectors, as well as firms owned by minorities, women and veterans,” said Office of Management and Budget director Scott Harry in the statement.

The state must sell the first 25% of the deal competitively under state GO statutes.

Additionally, the state plans to take competitive bids on up to $750 million of GOs in December to finance fiscal 2018 capital projects, according to the statement.

Rauner initially resisted pressure to move forward on the authorization and in recent days has continued his criticism of the borrowing and the fiscal 2018 budget. The budget was approved by Democrats in July with support from a handful of GOP members who broke with Rauner to pass it and then override vetoes. The borrowing authorization that allows for a maturity of up to 12 years and level principal repayment expires Dec. 31.

Under the state’s Prompt Payment Act, most bills that are more than 90 days old accrue interest at 1% per month, or 12% annually while bills from healthcare providers accrue 9% after 30 days under the Illinois Insurance Code.

The state's GOs have been trading this month at a 175 to 200 basis point spread over the Municipal Market Data's top-rated benchmark. MMD's Edward Lee said spreads narrowed on trades late last week by 35 basis points. The 10-year finished at a 175 spread on Friday. The 10-year benchmark has hovered just under 2% of late. Market participants said it's difficult to pinpoint, given that penalties could widen due to the size of the issue, but rates could land between 4% and 6%.

Multiple factors will influence the penalties such as its size and supply but market participants have said the state will have no problem placing the bonds.

The budget package accounts for debt service payments on only $3 billion of borrowing in the form of a projected ending balance. The administration previously said it was looking to identify several hundred million dollars in possible cuts to cover the remainder needed but its statement Friday did not address the issue.

Comptroller spokesman Abdon Pallasch said borrowing at a 6% rate would add about $75 million more to the state’s roughly $225 million set aside monthly for GO debt service.

S&P Global Ratings’ said in a recent commentary that given the state’s strained liquidity it could ill afford to pass up the opportunity to lower its interest on the backlog.

Passage of the budget with $5 billion in new taxes staved off a threatened cut to junk. S&P rates the state’s GOs BBB-minus with a stable outlook. Moody’s Investors Service rates them at Baa3 with a negative outlook, and Fitch Ratings assigns a BBB with a negative outlook.

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