(Adds Moody's rating, details on bond sale from governor's office, comments on bond sale from muni market participants, size of unfunded pension liability, Pennsylvania credit spread)
By Karen Pierog
CHICAGO Dec 23 Illinois on Wednesday avoided downgrades of its relatively low credit ratings ahead of the state's $480 million bond sale next month.
Standard & Poor's removed the immediate threat of a downgrade of Illinois' A-minus rating, but placed a negative outlook on it. Fitch Ratings affirmed a BBB-plus general obligation rating with a stable outlook, while Moody's Investors Service assigned Illinois' current Baa1 rating with a negative outlook to the new bonds.
An impasse between Illinois' Republican governor and Democrats who control the legislature has left the state without a budget for the fiscal year that began on July 1. The stalemate contributed to October downgrades by Fitch and Moody's of Illinois' ratings, which were already the lowest among the 50 states, to just three steps above "junk."
All three credit rating agencies warned on Wednesday that Illinois' ratings could be downgraded if the state fails to enact measures to address its fiscal problems.
"The negative outlook reflects our view that we could lower our rating to the 'BBB' category should Illinois reach a budgetary agreement that does not make significant improvements to its budgetary alignment," S&P analyst John Sugden said in a statement.
S&P, which said a downgrade was a possibility over the next six months, projected Illinois will end fiscal 2016 with a $4 billion to $5 billion operating deficit and that its unpaid bill pile, a gauge of the state's structural budget imbalance, would hit $10 billion. Due to court orders, Illinois has been spending at fiscal 2015 levels when revenue was higher because of a temporary hike in income tax rates.
Governor Bruce Rauner's office said the state will offer $480 million of GO bonds in a Jan. 14 competitive sale to raise money for construction projects. Illinois, once a top issuer of municipal bonds, has been absent from the public debt market since May 2014.
The new deal will mark the first bond sale under Rauner, who took office last January.
"I think overall there will be a concession to the current market. The size of the concession depends on what's going on in other parts of the marketplace," said Robert Amodeo, who heads municipals at Western Asset, referring to other muni deals competing with Illinois' for investors.
Dan Heckman, senior fixed income strategist at US Bank, said Illinois' bonds will be attractive to high-yield and non-investment-grade debt buyers "if spreads are wide and the issue is priced correctly."
Even before its ratings fell into the low-investment grade triple-B level, Illinois was paying a hefty penalty to sell debt given its huge unfunded pension liability, which grew to $111 billion in fiscal 2015, and chronic and large structural budget deficit.
Illinois' so-called credit spread over Municipal Market Data's benchmark triple-A yield scale stood at 170 basis points for bonds due in 10 and 30 years. By contrast, the credit spread for Pennsylvania, the only other state without a fiscal 2016 budget, is 47 basis points for 10-year bonds.
(Editing by Matthew Lewis)
Above is from: http://www.reuters.com/article/illinois-ratings-idUSL1N14C1K520151223
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