Illinois delays $1.2bn debt sale after penalty soars

Bloomberg

Illinois delayed the planned auction of $1.2 billion of short-term debt as it faces record-high penalties to borrow on Wall Street because of the deep financial hit the state is being dealt by the coronavirus shutdown.
The worst-rated state had planned to sell about $1.2 billion of short-term tax-exempt general-obligation debt on Wednesday, its first borrowing during the pandemic, to ease the revenue shortfall in the last two months of the fiscal year. The deal has been moved to “day-to-day status,” meaning it will be sold if market conditions warrant.
With the economic slowdown raising the risk of Illinois having its bonds cut to junk, investors have driven the yields on its two-year debt to nearly 4 percentage points above benchmark, far exceeding every other US state.
“Their spreads had already widened out dramatically on Covid-19 impact, on forecasted budgetary deficits for the next few years, obvious revenue
declines,” John Miller, head of municipals at Nuveen, said.
in a telephone interview on Tuesday. Coming to market now “would be more expensive than it has to be.”
The sale would have marked a major test of whether struggling American governments will be able to borrow easily to cover temporary shortfalls in their budgets as tax revenue disappears. The concern that market access could dry up — or become prohibitively expensive — has prompted the Federal Reserve to roll out plans to lend as much as $500 billion if needed, though the program has yet to extend any loans.
“The state of Illinois has developed its plan and is positioned to enter the market very soon if needed, but with the flexibility to assess the market as it returns from unprecedented dislocation,” Carol Knowles, a state spokesperson, said in an emailed statement. “Like many issuers, we are going day to day and assessing conditions to determine the best time to enter the market.”
The size, timing and structure of the state’s expected deals this month are subject to market conditions, she added. In response to a question about whether the state would consider tapping the Fed facility, Knowles said “Illinois’ short term borrowing law requires competitive bidding.”
“We fully intend to do both the short-term and the long-term borrowing,” she said. “The timing is fluid.”
Even before the global crisis, Illinois was deemed among the least prepared of states for a downturn with its $7 billion in unpaid bills, $137 billion in pension debt and almost no rainy day fund. Now the economic fallout from the virus is pushing states toward their worst fiscal crisis in decades, and Illinois has been singled out by some Republicans as undeserving of federal budget relief.