Illinois eyes using Fed muni facility for cash-flow borrowing

CHICAGO, May 15 (Reuters) – Illinois, the U.S. state in the worst fiscal shape even before the coronavirus outbreak, may be able to use the Federal Reserve’s new Municipal Liquidity Facility (MLF) for a pending cash-flow borrowing, now that the program will bid competitively for debt issued by eligible governments.

The central bank on Friday laid out a process under which the MLF, a tool announced last month to ease cash-flow pressures for state and local governments struggling with reduced tax revenue due to the coronavirus pandemic, could purchase their debt through competitive bidding.

Illinois is the lowest-rated state, at a notch above junk, and just this week had to pay a much higher yield than other states in the U.S. municipal market. A state spokeswoman told Reuters on Friday the MLF is under consideration now that a bidding process is available for the program.

The state is required to sell its short-term debt competitively and put on hold last week a $1.2 billion, one-year certificates sale meant to bridge low cash flow due to the economic fallout from the coronavirus outbreak and the postponement of the April income tax filing deadline until July.

“(The MLF) is something the state would consider,” said Carol Knowles, a spokeswoman for Illinois’ budget office.

She said Illinois will submit a so-called notice of interest form to enable the MLF, if it chooses, to bid on the certificates, which remain on the day-to-day calendar with the state prepared to enter the market “at any time.”

With Illinois’ huge unfunded pension liability and chronic structural budget deficits in mind, investors on Wednesday demanded fat yields for $800 million of the state’s general obligation bonds.

The Fed, which has not set a launch date for the $500 billion program, said the MLF will buy debt directly from eligible governments or will commit to buy debt not awarded to bidders in a competitive sale. Additionally, the MLF will submit its own bid in cases where the issuer is required by law to sell debt competitively and does not have the legal authority for a direct sale to the MLF. (Reporting by Karen Pierog; editing by Alden Bentley and Leslie Adler)

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