The US state of Illinois is to remarket US$600 million of variable-rate municipal bonds to avoid the costs of letters of credit (L/C) used in its current tranche of bonds.

According to the office of state governor Bruce Rauner, Illinois now plans to place the debt with four banks in a deal that will alleviate the need for costly L/Cs and ensure that the termination of interest rate swap agreements related to the debt will not be triggered.

Replacements needed

Illinois has six L/Cs that expire at the end of November by when they need to be renewed or replaced. They back bonds that reach maturity in 2033.

If Illinois was unable to replace or extend the L/Cs the state could be forced to pay US$150 million in swap termination fees as well as the entire US$600 million in principal plus interest over three years, according to Rauner's office.

Costly L/Cs

Fees for the L/Cs totalled US$37.8 million in the last three years according to state data.

The banks that have agreed the new deal, whose names were not disclosed, will hold the debt for two years under essentially the same terms as the current tranche of bonds, only without L/C backing.

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