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S&P downgrades sales tax-backed Build Illinois bonds

Wednesday, Oct 31, 2018 - Posted by Rich Miller

* S&P

S&P Global Ratings lowered its ratings on Illinois’ Build Illinois senior- and junior-lien sales tax bonds to ‘BBB’ from ‘AA-’ upon the implementation of our recently released priority-lien tax revenue debt criteria. The outlook is stable.

“The downgrade reflects our view of the state’s general creditworthiness, which, under the new criteria, limits the final ratings on priority-lien tax revenue debt,” said S&P Global Ratings credit analyst Gabriel Petek. Our priority-lien criteria takes into account both the strength and stability of the pledged revenues, as well as the general credit quality of the obligor where taxes are distributed and/or collected, in this case, the state of Illinois.

The ratings reflect what we view as Illinois’:

    • Deep and diverse economic base and above-average income levels supporting sales tax collections;
    • Very strong debt service coverage; and
    • Strong credit structure that we believe largely insulates bondholders from economic and revenue volatility, with an additional bonds test that significantly constrains future leverage.

Offsetting these strengths, in our view, is the state’s general credit quality (general obligation [GO] rating BBB-/Stable). To date, the Build Illinois bond program’s authorizing legislation has restricted its use to financing capital and infrastructure projects. While this remained the case even throughout the state’s two-year budget impasse, future legislatures could enact laws broadening the program’s allowable uses. In our view, the inability to prohibit future lawmakers from taking such action, combined with the state’s unresolved fiscal imbalances, links the credit quality of the Build Illinois sales tax revenue bonds to the state’s general creditworthiness. Therefore, the rating on the Build Illinois bonds is constrained from going higher unless we raise the state GO rating. […]

The downgrade affects $2.27 billion in existing Build Illinois sales tax bonds and the state’s recent issuance of $250 million of Build Illinois sales tax bonds. The junior-lien bonds are subordinate in the flow of funds to the senior-lien bonds outstanding, but we have assigned the same ratings to bonds of both liens due to the similar credit structure, strong bond protections against dilution of coverage by additional debt, and very strong debt service coverage from the pledged sales tax revenues levied statewide.

This is a bit nuts, if you ask me. They’re backed up by sales taxes, nobody has ever talked about using that bond program for anything other than capital and infrastructure projects and bonds get paid first under Illinois law.


  1. - Norseman - Wednesday, Oct 31, 18 @ 12:34 pm:

    Rich +1

  2. - 47th Ward - Wednesday, Oct 31, 18 @ 12:37 pm:

    ===future legislatures could enact laws broadening the program’s allowable uses===

    Future legislatures could do a lot of things. What makes anyone think this might be one of them?

    I agree with Rich. This nuts. There is no rational or real economic reason for this fear of a future GA.

  3. - RNUG - Wednesday, Oct 31, 18 @ 12:42 pm:

    Doesn’t make sense. If they were brokers, I’d say they were just looking to either juice future returns or tank current bonds for a short move.

  4. - Rich Miller - Wednesday, Oct 31, 18 @ 12:44 pm:

    RNUG, agreed.

  5. - Phenomynous - Wednesday, Oct 31, 18 @ 12:48 pm:

    Both gov candidates want major capital investments in the future. Ratings agencies helping bond buyers squeeze the juice?

  6. - wordslinger - Wednesday, Oct 31, 18 @ 12:49 pm:

    It’s totally nuts, an uncalled for, artificial premium on Illinois debt.

    Build Illinois bonds have an unblemished track record since they were first sold in the 1980s.

    But, of course, the state has never missed a payment, ever, on Illinois GO bonds, as well.

  7. - 39th Ward - Wednesday, Oct 31, 18 @ 12:51 pm:

    The job of a rating agency isn’t to answer “yes or no” to the question whether a certain bond will likely be paid off. It is to rank a bond’s quality relative to the strength of the tens of thousands of other similar bonds. On that basis the IL sales tax bonds are like IL general obligation bonds, which are of low quality. We have no one to blame but ourselves for the erratic political history that is part of that bond evaluation.

  8. - Juice - Wednesday, Oct 31, 18 @ 12:54 pm:

    On the one hand, as others have said, this move now seems entirely irrational.

    On the other, it has always seemed irrational that these would be looked upon more favorably from the ratings agencies than bonds backed by the full faith and credit of a sovereign entity.

  9. - Blue Dog Dem - Wednesday, Oct 31, 18 @ 12:54 pm:

    With all the online shopping going on, what has been the trend of late on revenue. As usual, I am not google savvy enough to find out.

  10. - Milorad - Wednesday, Oct 31, 18 @ 12:55 pm:

    A good point Rich but given the states fiscal irresponsibility in the past it’s not inconceivable that they would tap into that $$ for other purposes.

  11. - Moe Berg - Wednesday, Oct 31, 18 @ 12:58 pm:

    The ratings agencies were never held to account for their role in precipitating the Great Financial Crisis. A truly major failure of the Obama administration and Eric Holder Justice Department.

    Back then, it was giving high ratings to Collateralized Debt Obligations (CDOs) that were filled with junky, high-risk mortgages. Today, they are back at it, giving high ratings to Collateralized Loan Obligations (CLOs) that are filled with junky, high-risk corporate debt.

    Even if they are not brokers, it’s worth wondering what may be the hidden motivations for downgrading BIBs. They paid no price for their lack of scruples in the run-up to the GFC. I’d look at whose buying in the wake of this announcement.

  12. - wordslinger - Wednesday, Oct 31, 18 @ 1:02 pm:

    –The job of a rating agency isn’t to answer “yes or no” to the question whether a certain bond will likely be paid off. It is to rank a bond’s quality relative to the strength of the tens of thousands of other similar bonds. –

    You’re making that up.

    From S&P:

    –1. Long-Term Issue Credit Ratings
    7. Issue credit ratings are based, in varying degrees, on S&P Global Ratings’ analysis of the following considerations:

    The likelihood of payment–the capacity and willingness of the obligor to meet its financial commitments on an obligation in accordance with the terms of the obligation;
    The nature and provisions of the financial obligation, and the promise we impute; and
    The protection afforded by, and relative position of, the financial obligation in the event of a bankruptcy, reorganization, or other arrangement under the laws of bankruptcy and other laws affecting creditors’ rights.–

  13. - Rich Miller - Wednesday, Oct 31, 18 @ 1:08 pm:

    ===given the states fiscal irresponsibility in the past it’s not inconceivable===

    Utterly ridiculous. As broke as the government was before the 2010 tax hike and after the 2015 rollback and resulting impasse, nobody but nobody suggested tapping those funds. Nobody. They’re making this stuff up as they go along.

  14. - wordslinger - Wednesday, Oct 31, 18 @ 1:11 pm:

    In 2.5 years, Rauner ran the pile of unpaid bills from $6 billion to $16 billion. Hundreds of vendors were left holding the bag for goods and services already provided.

    Guess who got paid first, in full, on time, every time?

  15. - Huh? - Wednesday, Oct 31, 18 @ 1:15 pm:

    “They’re making this stuff up as they go along.”

    Does 1.4% have a controlling stake in S&P Global Rating? And he is directing them what to say?

  16. - Blue Dog Dem - Wednesday, Oct 31, 18 @ 1:19 pm:

    What exactly does senior vs junior lien mean.?

  17. - Demoralized - Wednesday, Oct 31, 18 @ 1:23 pm:

    ==With all the online shopping going on, what has been the trend of late on revenue.==

    What difference does it make? Bonds get paid first. There’s absolutely no danger here. The downgrade is just silly.

  18. - Downers Delight - Wednesday, Oct 31, 18 @ 1:27 pm:

    Wordslinger, completely agree. 39th Ward, that is exactly their duty.

    Further to the post, this downgrade was expected by the bond community. S&P has been working on this modified criteria for nearly a year. S&P’s new criteria links the priority-lien rating to the obligor’s GO, but gives anywhere from 1-4 notches of uplift depending upon structural features, separation from the obligor’s operations, the nature of the pledged revenue stream, etc. The new criteria was published on Oct. 22.

    The rating is now one notch above the State’s BBB-/Stable general obligation rating and will move with the GO rating or legislative changes that strengthen/weaken the credit. The move represents a change in criteria, and not a change to the underlying credit quality.

    S&P last week lowered the rating on the Chicago Sales Tax Securitization Corp’s bonds only one notch to AA-, or the maximum 4 notches above the City’s GO rating, based on the strong security features in place, walling it off from the City’s credit. Again, the Build Illinois credit does not have that same protection in S&P’s view, hence only a one-notch separation.

    Lastly, Moody’s and Fitch rate the Build Illinois bonds Baa3 and A-, respectively, which were well below S&P’s former rating of AA.

    The agencies have been constantly modifying their ratings criteria since the great recession. Some changes have punitively altered the credit ratings of undeserving municipal issuers. Criteria changes are always under review, but for now, Illinois is left holding the bag until positive budget momentum is created (one budget does not do that).

  19. - 37B - Wednesday, Oct 31, 18 @ 1:31 pm:

    Is this S&P’s way of helping Bruce out the door? One final credit downgrade on the Eve before the election.

  20. - Steve - Wednesday, Oct 31, 18 @ 1:32 pm:

    This might be a pre-recession CYA by S&P considering what they went through in 2008. Yeah, it doesn’t make much sense. But, then a lot of things don’t.

  21. - Downstate - Wednesday, Oct 31, 18 @ 1:34 pm:

    —-but nobody suggested tapping those funds.

    But we are seriously considering changing our state constitution. When you throw out those types of changes, the idea of tapping these funds is an even easier task to accomplish, even if it’s not currently being considered.

  22. - Anonymous - Wednesday, Oct 31, 18 @ 1:35 pm:

    Wordslinger, you seem to be proving my point. It isn’t “yes or no.” It’s “more likely or less likely.” On that basis, IL’s bond issues fall on the “less likely” side of the curve. That’s why we pay more in interest to get people to buy our bonds. Investors seek safety and we’re not selling safety.

  23. - Rich Miller - Wednesday, Oct 31, 18 @ 1:37 pm:

    ===But we are seriously considering changing our state constitution===

    I do not get why that bolsters your argument.

  24. - Nagidam - Wednesday, Oct 31, 18 @ 1:39 pm:


    Go read Downers Delight post @ 1:27pm. Spot on explanation.

    Will the GA add allowable expenditures to this revenue stream? Doubtful. The fact remains Illinois is in a precarious spot when the next recession hits.

  25. - Downers Delight - Wednesday, Oct 31, 18 @ 1:42 pm:

    Senior vs junior means who gets paid first with available dollars dedicated for the repayment of an obligation (loan).

    E.g. you stop paying your property taxes and your mortgage payment. The government has a higher lien on the first dollars from the sale of your house than the mortgage holder does.

    In the government’s case, bond issuers can prioritize development projects that have a higher likelihood of succeeding in order to attract lower interest rates.

    Build Illinois is a senior lien credit, like Rich said, because it is to be repaid with the first sales tax funds to be received by the state. (There is a monthly transfer to an outside Bond Trustee based on sales tax amounts collected and received, and the State usually satisfies its payment requirements for the year by the end of August.) Currently, the State has over 20x the amount of revenues dedicated to the repayment of the Build Illinois Bonds.

    Past performance of the BI program does not justify this downgrade. The issue is the new S&P criteria, which was just put into place.

  26. - Downstate - Wednesday, Oct 31, 18 @ 1:50 pm:

    —I do not get why that bolsters your argument.

    From the S&P commentary “…future legislatures could enact laws broadening the program’s allowable uses. In our view, the inability to prohibit future lawmakers from taking such action, combined with the state’s unresolved fiscal imbalances, links the credit quality of the Build Illinois sales tax revenue bonds to the state’s general creditworthiness”

    The S&P doesn’t trust future leaders from keeping their hands off of it.
    Our current leaders are all too happy to change our constitution to pay for past mistakes. Why would some bond language be considered any more sacrosanct?

    Not too be inflammatory, but Venezuelan bonds (backed by oil reserves) are also highly priced. It’s not that the reserves aren’t there. It’s that the rules by the Maduro regime are too easily changed.

  27. - Blue Dog Dem - Wednesday, Oct 31, 18 @ 2:15 pm:

    In a competitive bid situation, is there any laws or regulations requiring those bidding the rates to base there interest rates on a given bond rating? Example. If Stiefel thinks its a low risk, cant they bid it as low as they think the market will ensble it to resell the bonds?

  28. - Downstate - Wednesday, Oct 31, 18 @ 2:25 pm:

    Blue Dog,
    You are correct. However, institutional investors will only tolerate so many “BBB” rated bonds in their portfolio.

  29. - wordslinger - Wednesday, Oct 31, 18 @ 2:32 pm:

    ==Not too be inflammatory, but Venezuelan bonds….

    LOL, maybe a wee bit inflammatory, in this context?

  30. - Downstate - Wednesday, Oct 31, 18 @ 2:39 pm:

    LOL. Agreed. I was hoping the phrase, “Not to be too inflamatory” gave me sufficient cover. :)
    My intent was to drive the point home……with a sledge hammer!

  31. - JS Mill - Wednesday, Oct 31, 18 @ 3:59 pm:

    RNUG was spot on to begin with. The rest of you with your “yeah but” are ridiculous. You can engage in the never ending possibilities of “what if” but the fact remains, Illinois has always paid its bonds.

    Illinois problem is not the ability to PAY. It is the willingness to pay. Any time there is discussion of a tax rate moving north there is mass hysteria. If you want stuff you have to pay for it and you have to pay your debts. If California or Minnesota can we can too.

    The bond stuff is just a grift.

  32. - Blue Dog Dem - Thursday, Nov 1, 18 @ 6:58 am:

    Downstate. Help me out. Didnt Dodd-Frank, the SEC and the financial collapse lead us to stricter fiduciary responsibilities for bond sellers? Dont annual reports have to be supplied to the SEC which denote changing conditions that the original seller undergoes?

  33. - NorthsideNoMore - Thursday, Nov 1, 18 @ 7:19 am:

    Who makes money on this downgrade ? Follow this story over the next 10 months or more and then follow the money. The timing is fishy IMO.

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