KBRA Assigns AA+ Rating to State of Illinois, Build Illinois Bonds (Sales Tax Revenue Bonds), Junior Obligation Series A, B, and C of March 2025; Affirms Parity Debt; Outlook is Stable
26 Feb 2025 | New York
KBRA assigns a long-term rating of AA+ with a Stable Outlook to the State of Illinois (the "State"), Build Illinois Bonds (Sales Tax Revenue Bonds), Junior Obligation Series A, B, and C of March 2025 (the "Bonds"). KBRA additionally affirms the long-term rating of AA+ with a Stable Outlook for the State of Illinois' outstanding parity Build Illinois Bonds (Sales Tax Revenue Bonds), Junior Obligation.
KBRA’s Stable Outlook reflects the ample coverage of junior obligation debt service (69.8x for fiscal year 2024), supported by a broad-based, statewide source of sales tax revenues. The Outlook further reflects KBRA’s expectation that pledged sales tax revenues will continue to grow at a modest pace maintaining ample coverage of Build Illinois Bond obligations, and that future debt issuance authorized under the Build Illinois Bond Act will not materially dilute coverage levels.
Key Credit Considerations
The rating action reflects the following key credit considerations:
Credit Positives
- Security provisions are strong and include a priority lien on State sales tax revenues after payment of senior lien Build Illinois Bonds, a continuing appropriation requirement, and strong non-impairment language.
- The Bonds’ additional bonds test (ABT) requires 10.2x coverage of maximum annual debt service on combined debt outstanding, which significantly restricts the potential to overleverage.
- Expansive and diverse statewide sales tax base that has historically provided extraordinary coverage. For the past five fiscal years, debt service coverage has ranged from 30x-46x on combined senior and junior Build Illinois Bond obligations' annual debt service.
Credit Challenges
- The Bonds are secured by sales tax revenues, which can at times be adversely affected by economic factors, although the strong coverage levels and highly restrictive additional bonds test (ABT) helps insulate the Bonds from associated risks.
Rating Sensitivities
For Upgrade
- Accelerated growth in pledged revenue collections, coupled with manageable debt levels.
ESG Considerations
For Downgrade
- While unlikely, an instance wherein the State leverages debt levels to the ABT, in combination with a substantial economic downturn contributing to a sustained, sharp reduction in State sales tax revenues.
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