State postpones borrowing as scandal may lead to rating cut
Illinois delayed until next week plans to borrow $1.4 billion to boost cash flow as Governor Rod Blagojevich's arrest on federal corruption charges led Standard & Poor's to consider cutting the state's credit rating.
The Governor's Office of Management and Budget, which had planned to sell short-term notes today, will accept bids until Dec. 16 from investment banks seeking to underwrite the offering, according to a notice released late yesterday. The notes would represent the state's first cash flow borrowing for general purposes in five years, according to S&P.
Illinois faces a projected $2 billion budget shortfall this fiscal year at a time when Barack Obama, legislators and state officials have called for Blagojevich to step down after being accused of trying to sell the president-elect's U.S. Senate seat.
"The legal charges now facing the governor and his chief of staff may challenge the state to respond to this fiscal situation on a timely basis," S&P credit analyst John Kenward said in a statement from Chicago.
The New York-based rating company late yesterday placed the state's $19 billion in general obligation debt under review for possible downgrade from AA, the third-highest rating. S&P also yesterday said California, whose budget gap has widened to $14.8 billion, may be cut from A+.
Weakening state finances are weighing on municipal bonds, after a year when the market suffered from the collapse in auction-rate securities, downgrades of the bond insurance industry and waves of liquidations by municipal hedge funds.
Yields have been rising in the broader tax-exempt market as investors flee long-term securities. Municipal Market Advisors' index for AAA 30-year general obligation bonds rose to 5.84 percent yesterday, the highest in seven weeks.
Tax-exempt bonds have lost an average 8.2 percent in 2008, heading for their worst annual performance since Merrill Lynch & Co. started compiling its Municipal Master Index in 1989. The previous record was a 6.3 percent loss in 1999.
Among long-term sales today, Miami-Dade County offered about $172 million of general obligation bonds, after shrinking the deal from $350 million. Barclays Plc was the winning bidder among investment banks bidding for the bonds, with an interest cost of 5.95 percent, according to preliminary data compiled by Bloomberg.
Illinois postponed its note sale a day after seeking to reassure investors with an official notice that said the allegations faced by the governor don't relate to Illinois' need for cash or its ability to repay. Ginger Ostro, director of the budget office and issuer of the notices this week, didn't immediately return a request for additional comment today.