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CHICAGO, Oct 12 (Reuters) - Illinois expects to shield the state's coffers from a potential hit through a remarketing of $600 million of variable-rate bonds early next month, Governor Bruce Rauner's office said on Wednesday.
The state plans to place the debt with four banks on Nov. 7 in a deal that will alleviate the need for costly letters of credit and further ensure that the termination of interest rate swap agreements related to the debt will not be triggered.
The banks, whose names were not disclosed, will hold the debt for two years under essentially the same terms as in the existing letter of credit agreements.
There are six soon-to-expire letters of credit currently backing the debt, which was issued in 2003 with a final maturity in 2033. If the state were unable to replace or extend the letters of credit, which expire on Nov. 27, it could be forced to pay $150 million in swap termination fees, as well as the entire $600 million in principal plus interest over three years, according to Rauner's office.
Letter of credit fees for the bonds totaled $37.8 million from fiscal 2014 through fiscal 2016, according to state data.
"This action is more favorable to taxpayers and provides the state with more flexibility to prioritize spending for social services, education and our state's most vulnerable," the governor's office said in a statement.
Illinois is limping through a second straight year without a complete budget. A political impasse, along with a $111 billion unfunded pension liability and a growing pile of unpaid bills, have pounded Illinois' ratings into the low investment-grade level of triple-B.
As its ratings have fallen, Illinois was able to renegotiate rating-related swap termination triggers with swap counterparties Deutsche Bank, JP Morgan Chase Bank, Barclays Bank and Bank of America.
The state disclosed the plan for its only variable-rate debt ahead of the sale of $1.35 billion of fixed-rate general obligation refunding bonds on Thursday. Illinois also issued a warning to potential bondholders over potential pension payment delays.
Earlier this year, Illinois hired law firm Katten Muchin Rosenman and consultant Swap Financial Group to work on reducing its exposure to swaps and letters of credit related to the $600 million of bonds. (Reporting by Karen Pierog; Editing by Matthew Lewis)