CHICAGO – Illinois’ swap providers agreed to lower termination triggers, giving the state some breathing room if its ratings fall to a speculative grade, Gov. Bruce Rauner’s administration said Monday.
“We have renegotiated all of the ratings triggers on the swaps associated with the state’s variable rate debt to below BB-plus or Ba1,” said Rauner spokeswoman Eleni Demertzis.
S&P Global Ratings has warned a downgrade to junk looms if the state doesn’t make progress in stabilizing its finances and breaking a two-year-old budget impasse by the start of the fiscal year July 1.
The agreements were struck Friday and documents will eventually be posted on the Municipal Securities Rulemaking Board’s EMMA website.
A downgrade to junk would have triggered termination events on swaps tied to $216 million of debt linked to $600 million of floating-rate paper.
The $600 million from a 2003 issue and its related swaps represent just a small piece of the state’s $26 billion general obligation debt portfolio, and added costs wouldn't be large in the context of the state government's $14 billion backlog of unpaid bills.
But a termination event would ad to the list of consequences Illinois could face if its historic budget impasse drags into a third fiscal year July 1. If triggered, the state would need a forbearance from the banks or an appropriation would need to be approved to pay them off. In recent court filings, the state warned of the triggers and the financial burden terminations would pose.
The state announced last fall that it had renegotiated its five interest rate swaps, which included the novation of two, to lower the ratings thresholds that would trigger termination events.
The five swaps are with four counterparties and bear an interest rate of 3.89%. They were negatively valued at $153 million at the time but the negative valuation now totals about $107 million, according to recent court filings. The swaps that would have been triggered with a downgrade to junk account for less than half of the negative valuation.
Barclays is counterparty to two swaps each for $54 million, Bank of America is on one for $54 million, JPMorgan Chase is on one for $54 million, and Deutsche Bank is on $384 million.
Terminations were to have been triggered on the Barclays, JPMorgan, and BofA swaps if the state’s rating from Moody’s Investors Service or S&P Global Ratings fell to junk. The rating would now have to sink to BB/Ba2, or two notches below its current level, to trigger termination events.
The state already had more breathing room on the largest amount which was set at the lower threshold on the Deutsche Bank swap.
Illinois is the lowest rated state and no state has ever been rated junk.
Last fall, the state also remarketed the floating-rate paper in a direct placement with four banks. The bonds bear either a LIBOR or SIFMA-based interest rate with a mandatory tender date of Nov. 7, 2018.
DNT Asset Trust accounts for $226 million, PNC Bank NA accounts for $224 million, State Street Public Lending Corp. accounts for $75 million and RBC Municipal Products LLC accounts for $75 million. The first three bear an interest rate of 70% of 1-month LIBOR and the fourth is based on SIFMA.
The state spread rose from 2.95% to 3.45% based on downgrades by Moody’s and S&P Global Ratings earlier this month to Baa3/BBB-minus. If one of its ratings falls to junk the fee increases to 5.45%. If at least two drop the state to junk, the spread rises to 645 basis points. If any of its ratings fall to Ba2/BB, the spread jumps to 745 bp.
The Rauner administration said at the time the state pays a total in interest and fees of 6.79% on the bonds.