Is New Jersey the canary in Meredith Whitney’s coalmine? According to the WSJ, New Jersey may be the first state to use the highly unconventional approach of using a commercial bank funded bridge loan as large as $2.25 billion to “plug a cash shortfall.” The loan raised by Chris Christie’s state, “would cover bills the state will need to pay as its new fiscal year begins July 1. Normally, states have some cash available as they finish one fiscal year and begin the next, while gearing up for a bond offering based on the new budget…Terms of the loan, also known as a credit line, haven’t been finalized and negotiations could fall apart, according to the people familiar with the matter.” And since this will likely be a benchmark loan whose term sheet will be promptly circulated to other cash-strapped states, it will be all the more important in defining such key term components as subordination, collateralization, and general interest rates.
From the WSJ:
It can take up to two months to prepare the necessary documentation for a bond offering once a budget is set for the coming fiscal year, while the state’s cash crunch is likely to occur in the next few weeks, one of the people said.
Bank loans often require less documentation than a municipal bond does, and can be finalized in less time.
New Jersey put in place a $2 billion credit line in 2009, but didn’t need to use the loan because of a surge in back taxes that arrived in time, state officials said.
This year, officials don’t expect a last-minute reprieve, the person said.
The use of funds is tautological: repay debt.
The state would aim to repay the bridge loan with proceeds from the bonds it expects to issue later this summer, known as tax-and-revenue anticipation notes. Those bonds are expected to be paid off through tax receipts.
The source of the emergency funding would be loan shark extraordinaire, JPMorgan:
State officials are negotiating with J. P. Morgan Chase & Co. over terms for the bridge loan, following a spirited competition for the state’s business, several people familiar with the selection process said.
And in true JPM fashion, the loan’s interest would be low at first… then surge.
One person familiar with some proposed terms of the possible loan said the interest rate is relatively low, but it could shoot as high as 9% if the state didn’t pay back the bank in six months.
When this loan closes successfully, expect many more states to follow suit shortly as everyone attempts to plug cash shortfalls “while things improve” when the assumption of such an optimistic outcome is certainly in question now that the economy has officially turned down.
The good news for M-Dub haters: the can has just been kicked down for another 6 months…