Illinois Faces Rising Risk of Cut to Junk Over Pandemic Hit

(Bloomberg) -- The risk of Illinois falling into junk territory is growing amid the economic toll and costs from battling the coronavirus pandemic.

The lowest-rated U.S. state is “increasingly likely” to be the first to carry a non-investment-grade rating on its general-obligation bonds, according to a Municipal Market Analytics report. Covid-19 threatens to reverse Illinois’s fiscal progress and could hurt the prospects of voters approving a progressive income tax in November to bring in more revenue, MMA analysts Matt Fabian and Lisa Washburn said in the report.

Still, Illinois general-obligation bonds have “minimal risk” of near-term default, according to the analysts, citing a state law that pre-funds G.O. debt service payments.

“Investors worried more about default than ratings should find strong value in dramatically wider state spreads,” wrote Fabian and Washburn. “Even if the state is downgraded to ‘junk’ its credit spread will reasonably tighten once the municipal high yield market stabilizes.”

S&P Global Ratings on Friday cut its outlook for the state’s general-obligation bonds to negative, citing at least a one-in-three chance that economic conditions worsen enough to affect Illinois’s ability to stay in line with the investment-grade rating level. The spread on the state’s 10-year bonds compared with AAA benchmark securities has surged amid these concerns.

“The state of Illinois is committed to working through the difficult challenges brought on by COVID-19,” Jordan Abudayyeh, a spokeswoman for Governor J.B. Pritzker, said in an email. “The state prioritizes its debt payments and will ensure we stay on track through this crisis.”

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