CHICAGO, Oct 17 (Reuters) - Moody’s Investors Service said on Monday that Illinois’ plan to place $600 million of variable-rate bonds with four banks next month removes a threat to the state’s liquidity.
The lowest-rated U.S. state has said it will remarket the bonds on Nov. 7 in a deal that will alleviate the need for costly letters of credit backing the debt and further ensure that the termination of interest rate swap agreements related to the debt will not be triggered.
The banks will hold the debt for two years under essentially the same terms as in the letters of credit related to the existing six pacts.
“The agreement is positive for the state, which otherwise faced accelerated maturity of the debt under the terms of existing letters of credit,” Moody’s said in a report.
The bonds, Illinois’ only outstanding variable-rate debt, were originally sold in 2003 with a final maturity in 2033.
If the state were unable to replace or extend 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, Governor Bruce Rauner’s office said last week.
The credit rating agency said Illinois must still find a way to extricate itself from the swaps within the next two years. The state in recent months renegotiated ratings-related swap termination triggers with swap counterparties Deutsche Bank, JP Morgan Chase Bank, Barclays Bank and Bank of America .
Moody’s rates Illinois Baa2 with a negative outlook.
Reporting by Karen Pierog; Editing by Matthew Lewis