May 5, 2020 / 2:20 PM / 20 days ago

Illinois to sell debt as fiscal woes worsen in coronavirus outbreak

    By Karen Pierog
    CHICAGO, May 5 (Reuters) - Illinois, the U.S. state in the
worst fiscal straits even before the COVID-19 pandemic, faces
high borrowing costs when it sells $2.2 billion of debt starting
on Wednesday, in part to deal with the economic fallout from the
    But in a zero-interest-rate environment, the higher yields
could attract investors willing to focus on the state's
irrevocable and continuing appropriation to pay off its general
obligation (GO) debt and not its worsening financial woes.
     The debt sales come as the state risks a GO credit rating
downgrade to junk depending on how it deals with revenue losses
resulting from the new coronavirus outbreak and on whether any
of that loss will be offset by federal dollars, according to
Daniel Solender, director of Lord Abbett's municipal bond group.
    "(Illinois) should have market access, but their borrowing
yields are going to have to adjust higher if they want to raise
the amounts they want with the new issue," he said. 
    On Wednesday, Illinois will offer $1.2 billion of one-year 
GO certificates via competitive bidding to boost cash flow
during the crisis, particularly after the state moved the filing
date for personal and corporate income taxes to July 15 from
April 15.
    Next week, the state plans to sell $1 billion of tax-exempt
and taxable GO bonds maturing between 2021 and 2045 to fund
summer construction projects and for an ongoing pension benefit
buyout program for retiring workers.
    Illinois has projected revenue losses totaling about $2.7
billion in fiscal 2020 and $4.6 billion in fiscal 2021,
reflecting soaring unemployment and lower consumer spending due
to a statewide stay-at-home order that remains in effect until
the end of May to slow the virus' spread.             
    The state's ongoing fiscal problems, including a $137
billion unfunded pension liability, have thrust it into the
spotlight as the U.S. Congress mulls additional aid measures. 
    Citing Illinois as an example, President Donald Trump on
Twitter last week questioned why Americans should be "bailing
out poorly run states."             
    Meanwhile, Illinois' borrowing penalty in the $3.8 trillion
U.S. municipal market, the biggest among states, has grown. 
    The spread for its 10-year bonds over Municipal Market
Data's benchmark triple-A yield scale widened to a record-high
396 basis points on Monday from 298 basis points on April 1. By
contrast, the spread for coronavirus-ravaged New York state's
10-year bonds was just 13 basis points over the scale. 
    With last month's downgrade by Fitch Ratings, Illinois, the
lowest-rated U.S. state, is now just a notch above junk with
negative outlooks from all three major credit rating agencies.
    A BofA Global Research report on Friday said: "Ultimately,
we think there is a better than 50-50 chance that Illinois will
be downgraded to below investment grade by the end of 2020 by at
least one rating agency. That does not mean, however, that we
expect the state to default on its debts."
    As long as it retains one investment-grade rating, most
funds can continue to buy the state's debt, according to John
Mousseau, president and CEO of Cumberland Advisors.
    The fact that Illinois bonds have "yield in spades" could
draw overseas buyers thirsting for yield to the $300 million of
taxable bonds the state is selling next week, he said.
    "Having a wider audience, particularly if you are a credit
that has issues, is better," he said.

 (Reporting by Karen Pierog; editing by Jonathan Oatis)
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