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Illinois Moves Toward First Test of Fed’s Lending Lifeline

Amanda Albright and Shruti Date Singh

(Bloomberg) -- Illinois may be one of the first -- and most high-profile -- governments to test the Federal Reserve’s $500 billion lending lifeline for states and cities.

The state is working on a so-called notice of interest that it will submit to the Fed, the first step toward borrowing from the central bank, said Carol Knowles, a spokesperson for the Governor’s Office of Management and Budget.

The move comes after Illinois postponed the planned auction of $1.2 billion short-term debt earlier this month as its bond yields surged amid concern about the financial hit it faces from the coronavirus shutdown.

States and local governments with weaker credit ratings like Illinois, the lowest-rated state, may be the ones that end up tapping the program because others can avoid the Fed’s penalties by borrowing at near-zero rates in the public markets. Borrowers also must try to secure loans from traditional lenders first, which could mean that highly rated credits, won’t need to tap the Fed.

During his Covid-19 briefing on Wednesday, Governor J.B. Pritzker addressed questions about a proposal floating in the legislature to issue up to $4.5 billion of short-term debt to the Fed facility, including whether Illinois intended to issue the full amount. Crain’s Chicago Business first reported on the plan.

“I think that we’re going to see a state and local funding bill go through the Senate,” Pritzker said in reference to another federal stimulus measure. “So our hope is to not have to access that window that’s been made available to states, but we will if we need to.”

Well Below

Borrowers with a BBB- rating face a 380 basis-point spread penalty on loans, according to the central bank. Even so, Citigroup Inc. estimated in a report that Illinois could borrow at a rate that’s well below the “current market yield,” which is about 4.66% on 2-year debt, according to Bloomberg’s BVAL index.

Issuers have to submit a notice of interest to the Fed before submitting an application. BLX Group LLC, a subsidiary of law firm Orrick, Herrington & Sutcliffe that the central bank hired for the municipal lending program, will review the notices of interest.

Before getting the loan from the Fed, the issuer must also provide a certification that it tried to “secure adequate credit accommodations.” Illinois’s short-term debt sale, initially expected May 6, was delayed as the state faced record-high penalties to borrow on Wall Street.

The lending program now allows the Fed to participate in a competitive bid process like Illinois requires, according to Knowles.. The state’s short-term certificates must be competitively bid, she said.

“We are continuing to monitor the municipal market and are prepared to enter at any time,” Knowles said in an email Wednesday, noting that the certificates are day-to-day status.

Illinois is eligible to borrow about $9.7 billion under the program, according to the New York Fed.

Kent Hiteshew, whom the Fed hired to help oversee the lending program, said at a virtual event this week that the central bank would move quickly to approve the notices of interest and applications for issuers that apply with straightforward debt offerings.

“We should begin purchasing notes in the very near future,” he said during the event.

(Updates with governor’s comments starting in fifth paragraph)

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