CHICAGO – Illinois took a one notch rating hit from S&P Global Ratings Thursday leaving its general obligation debt at the brink of junk and appropriation-backed bonds in speculative grade territory.

The action came less than 12 hours after the Illinois General Assembly adjourned its spring session without agreement on a budget plan that would end two years of political gridlock driving a historic budget impasse.

Illinois State Capitol
Illinois received a downgrade as the state's leaders continue their failure to produce a budget. Adobe Stock

S&P dropped the state’s BBB rating to BBB-minus and warned another blow could come soon by putting the rating on CreditWatch with negative implications.

The state's appropriation debt, including bonds issued by the Illinois Sports Facilities Authority and the Metropolitan Pier and Exposition Authority, fell one notch to BB-plus. Moral obligation backed debt, already at junk ratings, fell one notch to BB-minus.

"The rating actions largely reflect the severe deterioration of Illinois' fiscal condition, a byproduct of its stalemated budget negotiations, now approaching the start of a third fiscal year," said S&P Global Ratings analyst Gabriel Petek. "We placed the ratings on CreditWatch with negative implications because, in our view, the unrelenting political brinkmanship now poses a threat to the timely payment of the state's core priority payments."

Analysts said they now fear “Illinois is now at risk of entering a negative credit spiral, where downgraded credit ratings would trigger contingent demands on state liquidity, further exacerbating its fiscal distress.”

While CreditWatch placements are typically resolved on a 90-day time horizon, S&P said it anticipates resolving the placement around the start of its 2018 fiscal year July 1.

“If lawmakers fail to reach agreement on a budget with provisions designed to reduce the state's structural deficit, it's likely we will again lower the ratings,” S&P said. “The ongoing budget impasse has increased the nonpayment risk associated with Illinois' obligations that require a budget appropriation before they can be funded. We now view these payment obligations as having speculative-grade characteristics.”

S&P also stripped sales-tax backed Build Illinois revenue bonds of their top AAA rating, lowering it to AA-minus. The rating also is on CreditWatch negative.


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