CHICAGO, May 26 (Reuters) - Illinois has hired outside consultants at a two-year cost of $525,000 to reduce its exposure to bond-related agreements with banks that could cost the cash-strapped state more than $100 million.
A notice Thursday on the state's procurement website said Katten Muchin Rosenman beat out 10 other law firms for a two-year, $100,000 contract to assist with the potential termination of interest-rate swap transactions and with replacing bank letters of credit. The instruments are related to $600 million of variable-rate bonds Illinois issued in 2003.
Last month, New Jersey-based Swap Financial Group won a $425,000, two-year contract to develop and execute strategies aimed at mitigating swap risks.
The hires come as the nation's fifth-largest state is inching closer to a situation that could trigger the termination of interest-rate hedge agreements with five banks.
Further downgrades of Illinois' relatively low general obligation credit ratings could force the state to pay termination fees to the banks estimated at $163 million, according to the state's solicitation to prospective law firms.
The trigger would be a two-notch downgrade of the state's Baa1 rating with Moody's Investors Service to Baa3 or a three-notch downgrade of its A-minus rating with Standard & Poor's to BBB-minus. Both agencies have warned of future downgrades if Illinois' big pension problem and structural budget deficit worsen.
With the end of the Illinois legislature's key spring session looming on Tuesday, there is no sign of legislation to ease the state's $111 billion unfunded pension liability. Illinois, the only U.S. state without a complete fiscal 2016 budget, could be on track for a repeat as its Republican governor and Democratic-controlled legislature have yet to forge a fiscal 2017 spending plan.
The swap counterparties are AIG Financial Products Corp, Bank of America, Merrill Lynch Capital Markets, JP Morgan Chase, and Loop Capital Markets, with credit support from Deutsche Bank AG.
Illinois also faces the expiration of six bank direct-pay letters of credit backing the variable-rate bonds on Nov. 26. If the facilities are not renewed by the current banks or replaced by other banks, the state could be forced to pay off some or all of the bonds before their 2033 maturity.
The letters of credit are from JP Morgan Chase Bank, PNC Bank, Wells Fargo Bank, State Street Bank and Trust Company, Royal Bank of Canada, and The Northern Trust Company. (Reporting by Karen Pierog; Editing by Matthew Lewis)