May 5, 2020 / 6:05 PM / a month ago

UPDATE 1-Illinois taps brakes on debt sales to assess market conditions

 (Recasts with state's postponement of debt sale, adds comments
from state budget spokeswoman)
    By Karen Pierog
    CHICAGO, May 5 (Reuters) - Illinois, the U.S. state in the
worst fiscal straits even before the COVID-19 pandemic, has put
the scheduled sale of $2.2 billion of debt on hold due to market
conditions, a state spokeswoman said on Tuesday.
    Carol Knowles, spokeswoman for Illinois' budget office, said
  $1.2 billion of cash-flow certificates, initially set to sell
on Wednesday, were placed on the day-to-day sale calendar while
the state assesses "the best time to enter the market." 
    A $1 billion taxable and tax-exempt general obligation (GO)
bond deal will follow once the certificates are sold, she added.
    The $3.8 trillion U.S. municipal market is trying to recover
from unprecedented volatility sparked by selling by
virus-rattled investors.             
    Illinois is facing much heftier borrowing costs than other
states, but in a zero-interest-rate environment, the higher
yields could attract hungry domestic and foreign investors. 
    The spread for Illinois 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. 
     The Illinois debt sales come as the state risks a general
obligation (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. 
    The state 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.             
    Ongoing fiscal problems, including a $137 billion unfunded
pension liability, have thrust Illinois 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."             
    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, he said. 
    "Having a wider audience, particularly if you are a credit
that has issues, is better," he said.
    The deals consist of one-year GO certificates selling via
competitive bidding to raise cash during the crisis and GO
bonds, maturing from 2021 to 2045, to fund summer construction
projects and an ongoing pension benefit buyout program for
retiring workers.

 (Reporting by Karen Pierog in Chicago
Editing by Jonathan Oatis and Matthew Lewis)
  
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