Illinois Gov. Bruce Rauner signed legislation authorizing the Metropolitan Pier and Exposition Authority to make its bond payments despite even without a state budget in place.

CHICAGO — Illinois Gov. Bruce Rauner signed legislation Thursday that allows the Metropolitan Pier and Exposition Authority to make its debt payments even without a state budget in place.

Market participants said they expect the MPEA legislation will help chip away at a 100 basis point spike in secondary market trading, though it won't restore the high-grade ratings the MPEA lost after a technical default last month.

The authorization was packaged in a bill that also authorizes the appropriation of $5 billion in federal funds.

The legislation on both fronts was needed as a result of the stalemate between the first-year Republican governor and the General Assembly's Democratic majority over a budget for the fiscal year that began July 1.

The MPEA provision means bondholders can rest easy they will be paid on Dec. 15.

"This bill ensures that the operations at Navy Pier and McCormick Place, which are two engines of our economy, are funded," Chicago Mayor Rahm Emanuel said in a statement. "It also ensures that we leave no federal dollars on the table which can support our residents." MPEA operates the two Chicago-based facilities.

The legislation permits MPEA to draw from the account that holds pledged tax revenues to cover monthly payments to the bond trustee and also to make its December debt service payment. The agency requires an appropriation to do both and without a state budget in place it could not make the $20.8 monthly payment due to the trustee July 20.

The failed transfer triggered a technical default and prompted Standard & Poor's to strip the agency's $3 billion of debt of its AAA rating and Fitch Ratings to lower its AA-minus rating.

Both dropped the ratings to BBB-plus, one level below the state's A-minus rating, as they re-characterized the agency's debt as subject to appropriation risk.

The legislation frees up a total of $167 million in MPEA project funds needed for debt service in fiscal 2016.

No further rating action is expected.

Fitch and Standard & Poor's previously recognized the strength of a mechanism that traps revenues and preventing their use elsewhere. That won the higher level ratings, which were erased after the technical default.

Moody's had already considered the credit an appropriation risk and rates the authority's debt Baa1 with a negative outlook, one notch lower than the state.

Market participants have offered a range of opinions on the MPEA credit following the downgrade, with some suggesting the agency's debt offers an opportunity and others skeptical of the state exposure.

"In our view, the hiatus in monthly debt service deposits was an unfortunate side effect of the state budget impasse and does not signal an unwillingness or inability to pay," Barclays municipal research group said in a commentary. "With yields near 18-month highs, Met Pier bonds are attractive and we believe that yield differentials between the Met Pier and comparable indices could tighten over the medium term."

Cumberland Advisors noted steady growth in Met Pier's revenues that actually improves its underlying credit quality.

"Met Pier has been held hostage by the Illinois legislature, which should have unconditionally appropriated money to cover debt service," the firm wrote in a recent commentary authored by Michael Coomes and John Mousseau.

"The political paralysis in Illinois does not make Met Pier a bad credit," they wrote. "It is a good credit held hostage by the vagaries of the municipal market's retail buyer base and headline risk. At Cumberland, we have sold our uninsured Met Pier debt because of these heightened political risks. We believe that Met Pier bonds will not be prudent investments until Illinois' political issues are resolved."

A Cumberland chart underscores the credit's general exposure to negative local headline risks.

One MPEA bond at 3.5% at the end of April jumped about 75 basis points in May and June.

Coomes largely attributes that movement to the negative headlines over Chicago's credit woes and Illinois' budget impasse. Trading spreads eased a bit, settling at 4% before then spiking by about 100 basis points after disclosure of the technical default.

"You're not going to see them retrace 100%, but there should be some tightening" in recognition of the political action, Coomes said Thursday.

The Senate voted unanimously to approve the legislation late Wednesday. The House unanimously approved it last week.

The authority's nearly $3 billion of bonds are backed by taxes on hotel stays, car rentals and other tourist services with statewide sales tax revenues allocated by statute to cover shortfalls between annual tourism tax revenues and debt service.

Moody's Investors Service last week labeled the MPEA's inability to make its monthly debt service deposit a "credit negative" for Illinois' A3 rating.

"This lapse is symptomatic of the state's political paralysis and ongoing failure to enact a budget for fiscal 2016, which began 1 July, and is credit-negative for Illinois," Moody's analysts wrote.

 

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