By Karen Pierog
CHICAGO, April 15 (Reuters) - Illinois is seeking legal help
as its deteriorating credit standing threatens to end
bond-related deals with banks at a big cost to the cash-strapped
state, according to a government website.
A week ago, Illinois advertised for an outside law firm to
assist with potential termination of interest-rate swap
transactions and with replacing bank letters of credit, both
related to $600 million of variable-rate bonds issued in 2003.
Illinois set an April 22 deadline for responses from bond
counsel firms, in a request for proposals on the state's
procurement website.
"The Rauner Administration is exploring options to reduce
taxpayers' risk exposure to swap agreements entered into by
prior administrations," Catherine Kelly, a spokeswoman for
Republican Governor Bruce Rauner, said on Friday in an emailed
answer to questions.
The nation's fifth-largest state is inching closer to a
situation that could trigger 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 recently 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.
Illinois has the lowest credit ratings and worst-funded
public pensions among the 50 U.S. states. An impasse between its
Republican governor and Democrats who control the legislature
has left the state without a full budget for the fiscal year
that began July 1.
The state's pile of unpaid bills, a gauge of its structural
deficit, has ballooned to $7.36 billion, while options for
dealing with a $111 billion unfunded pension liability are
limited.
The swap counterparties are AIG Financial Products Corp,
Bank of America (NYSE:BAC), Merrill Lynch Capital Markets, JP Morgan Chase (NYSE:JPM),
and Loop Capital Markets with credit support from Deutsche Bank (DE:DBKGn)
AG.
Also looming is the Nov. 26, 2016 expiration of six bank
direct-pay letters of credit backing the variable-rate bonds. 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 (NYSE:WFC) Bank, State Street Bank and Trust Company,
Royal Bank of Canada, and The Northern Trust (NASDAQ:NTRS) Company.