New Jersey officials are considering taking a $2.25 billion “bridge loan” from JP Morgan to close the state’s cash shortfall, the Wall Street Journal reports.
The unconventional move would make New Jersey the first state to tap a major commercial bank loan to cover its bills for the first few weeks of the new fiscal year (which begins July 1st). Typically, states start a new year with enough cash on hand to tide them over until they can arrange a late summer bond offering based on the new budget.
The credit line hasn’t been finalised but is designed to give New Jersey enough cash on hand while it prepares for a bond offering, a process that can take up to two months.
The interest rate is “relatively low” but could go as high as 9% if the state doesn’t pay the bank back in six months, a person familiar with the talks told the WSJ.
The state would repay the bridge loan with proceeds from the bonds. The bonds are expected to be paid off with tax revenues.
Tyler Durden at Zerohedge points out that New Jersey’s loan would likely be used as a benchmark for other cash-strapped states, defining key loan terms like subordination, collateralization and interest rates. If the deal closes successfully, expect more states to get on board with this new short-term budget fix.
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