Swap risks spur Illinois search for legal expert

Fri Apr 15, 2016 4:51pm EDT
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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.   Continued...