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.