CHICAGO — Illinois yesterday sold $1.25 billion of general obligation cash-flow certificates at a blended interest rate of 1% in a sale that followed Standard & Poor's decision to shift the state's GO outlook to negative.
The notes were rated SP-1 by Standard & Poor's and F1 by Fitch Ratings, both one notch below top short-term credit marks. Moody's Investors Service was not asked to rate the notes that were divided into three maturities; one for $500 million that is due on March 23, another $250 million due on April 13, and the final $500 million due on June 10.
The individual series attracted six to seven bids each and JPMorgan offered the lowest bid on all three for a blended rate of 1%, said state debt manager Phil Culpepper.
Pugh, Jones, Johnson & Quandt PC was bond counsel.
"We were very pleased with the interest and the bids," Culpepper said. "We feel JPMorgan bid very aggressively. We hope that our investor briefing along with the security and liquidity of the general obligation credit was helpful."
Sizeable fund balances in non-general fund accounts help boost the state's ability to repay the notes even as it faces a cash crunch. It was not yet clear who JPMorgan placed the securities with, as money market funds can hold the debt, but any downgrade in the short-term marks would force the funds to sell it.
The deal follows the state's $1 billion certificate issue in May. Illinois initially anticipated issuing both note transactions before the fiscal year ended June 30 with repayment in fiscal 2010, but put the second piece on hold due to a lack of a budget agreement.
The state will close on the new transaction next week, ahead of the end of Illinois' so-called lapse period for spending. Under that policy, the state can pay bills incurred in fiscal 2009 with fiscal 2010 revenues for up to 60 days after the end of the prior fiscal year. The state closed out the fiscal year with nearly $4 billion in unpaid bills.
The Standard & Poor's outlook change marked the latest in a series of negative credit news the state has received since passage of its $54 billion fiscal 2010 budget last month that relied heavily on one-time revenue measures. The state late Wednesday released an addendum to its offering statement with an official notice notifying potential bidders of the outlook change.
Standard & Poor's downgraded the state to AA-minus from AA in March and its outlook this week was changed to negative from stable, leaving the state some room to address its fiscal balance in early 2010. Fitch late last month downgraded the state's GO rating two notches to A. Moody's in April lowered the state's rating one notch to A1. It then last month placed the credit on watch for a possible downgrade.
"We base the outlook revision on Illinois' failure to address the fiscal 2009 deficit and its high reliance on nonrecurring measures in the enacted fiscal 2010 budget," Standard & Poor's analyst Robin Prunty wrote. "The absence of recurring solutions in the next year to deal with the current budget challenges will likely result in a downgrade."
Analysts took lawmakers to task for their failure to adopt a more sound budget, saying the state has the power to address it problems by limiting spending or raising revenues, but lawmakers were unwilling to do so. "We believe Illinois' willingness to implement difficult and politically unpopular measures to restore budget balance is questionable," Prunty said.
Gov. Pat Quinn pushed for an income tax increase but lawmakers refused, while Quinn countered that deeper cuts would harm social services. The budget ultimately relied on some cuts, but also one-time maneuvers, like issuing $3.4 billion to cover a portion of the state's pension payment. Lawmakers will need to address the state's revenue situation, however, early next year as the current budget puts it on track to end the fiscal year with a $3.4 billion deficit.
Factors that support the state's credit include its deep and diverse economy, anchored by the Chicago metropolitan region; above-average income levels; and almost unlimited ability to raise tax and other revenues.
In addition to its dwindling revenue collections and lack of action to fully balance the budget, the state is strained by a $73 billion unfunded pension liability and low general fund reserves, Standard & Poor's wrote.