Illinois Delays $1.2 Billion Bond Issue. Will It Tap New Fed Bailout Program?

Authored by Ted Dabrowski via Wirepoints.org,

Illinois has postponed a planned $1.2 billion short-term bond issue for tomorrow and says the deal is now day-to-day. The state plans another $1 billion the following week. 

The state wants the $1.2 billion to ease cash flow issues stemming from the state’s delay of its income tax filing deadline to July 15 from April 15. The additional $1 billion is to fund summer construction projects and for the state’s pension buyout program.

The postponement of the deal is likely due to the slew of recent bad news coming out of the state. All three major ratings agencies now rate Illinois just one notch from junk and all have negative outlooks. The state’s recent revenues have been severely impacted by the economic shutdown, as April’s year-on-year tax revenues are down by $2.6 billion. And the Illinois Senate Democratic request for a bailout, followed by Sen. Mitch McConnell’s bankruptcy comments in response, for sure didn’t help market perception of Illinois.

All that pushed up the state’s borrowing penalty to nearly 400 basis points over AAA-rated credits, even before the state came to market. By comparison, Reuters reports that New York state bonds are just 13 basis points over.

Now, Illinois may have willing lenders in the market, but the spreads may be far beyond what Illinois is willing to pay.

In contrast, other borrowers including CaliforniaLouisiana and Maryland tapped the credit markets in March, while other municipal entities like New York City, New York State Power Authority, San Francisco, Missouri University, and San Diego’s Public Facilities accessed the market as recently as last week.

If Illinois can’t access the financial markets, it may eventually attempt to tap the new Federal Reserve “Municipal Liquidity Facility.” The program is not up and running yet, and accessing the money in the Fed program may not be easy. That’s according to Fox Business News Correspondent Charles Gasparino here.

There are certain certifications Illinois must make to receive money from the Fed. First it must certify it could not successfully access the credit markets and second it must certify it is not insolvent. Here are the details from the Fed FAQ.

What legal opinions and certifications will be required?

Eligible Issuers will be required to deliver standard legal opinions for the issuance of debt, including, but not limited to, an opinion of nationally recognized note counsel as to the validity, enforceability, and binding nature of the notes. Each Eligible Issuer must also provide a written certification that it is unable to secure adequate credit accommodations from other banking institutions and that it is not insolvent. Further information on required legal opinions and certificates will be determined and publicly announced prior to commencement of the MLF.

For the purposes of participating in the MLF, what does it mean for an Eligible Issuer to certify that it is unable to secure adequate credit accommodations? 

The Federal Reserve must obtain evidence that participants in the MLF are unable to secure adequate credit accommodations from other banking institutions. In certifying whether the issuer is unable to secure adequate credit accommodations from other banking institutions, issuers may consider economic or market conditions in the market intended to be addressed by the MLF as compared to normal conditions, including the availability and price of credit. Lack of adequate credit does not mean that no credit is available. Lending may be available, but at prices or on conditions that are inconsistent with a normal, well-functioning market.

The implications of Illinois going to the Federal Reserve would be twofold.

One, it would increase the state’s borrowing costs even further – the Fed will purportedly charge a punitive rate for access to the facility.

But more importantly, it would send a signal to the market of Illinois’ further distress.