January 7, 2016
After a 20-month hiatus from the municipal bond market, the State of Illinois recently announced it would sell bonds later this month in order to continue paying for ongoing capital projects in need of additional funding.
According to the bond sale documents posted online, the State will sell $480 million of tax-exempt bonds on January 14, 2016. The bonds will be sold through a competitive bid process and will include equal amounts of principal repaid over 25 years to comply with State statutes that require level principal repayment. The State is also required to sell 25% of its bonds through competitive bidding.
These new bonds only represent a small portion of the total bond funding proposed in the FY2016 capital budget. The budget proposed for FY2016 included the issuance of $1.1 billion in new bonds to fund construction projects in the current fiscal year and $250 million for projects in FY2015 that were not sold.
The State’s last General Obligation bond sale took place in May 2014 totaling $750 million. Illinois went to market with $3.7 billion of capital-purpose bonds in FY2014 to fund ongoing spending for the Illinois Jobs Now! capital spending program. Since 2010, the State has authorized the sale of $16.2 billion in capital-purpose General Obligation bonds and issued $11.4 billion of that new debt to fund capital projects. In all, $12.3 billion in debt funded construction projects have either been completed or are underway.
Recent reports anticipate a very high cost of borrowing for the State of Illinois compared to benchmark AAA-rated securities, due to bond rating downgrades associated with the FY2016 budget impasse. As previously discussed, two of the three major rating agencies downgraded the State’s General Obligations Bond rating one notch below the ‘A’ level in October 2015 citing the fact that the State was several months into the current fiscal year without a budget and with little progress on a balanced spending plan.
All three rating agencies affirmed these State’s bond ratings in anticipation of the January 14 bond sale. Moody’s Investors Service currently rates the State as Baa1 with a negative outlook. Fitch’s ratings puts the State at BBB+ with a stable outlook and Standard and Poor’s rates Illinois as A- with a negative outlook.
Illinois is currently the only state with General Obligation bonds rated below the A level.
Due to the fiscal uncertainty and lower ratings, the State’s outstanding debt has increased in yield on the secondary market. The highest yields, which represent the interest rates after accounting for discounts and premiums at the time of sale, when the State last sold bonds were 1.1 percentage points higher than the benchmarks for top-quality municipal bonds. As recent as November, the State’s outstanding debt was trading with yield totaling 1.75 percentage points more than benchmark municipal securities.
The total interest cost charged for the borrowing will not be known until after the bond sale is complete. Closing is currently scheduled for January 26, 2016.