State: $480M bond issue breaks 20-month hiatus

By Karen Pierog
Reuters

Illinois sold $480 million of bonds on Thursday, its first debt issue in nearly two years, with the U.S. municipal market’s hunger for higher-yielding assets easing the interest penalty the state is paying for its fiscal woes.

The deal marks the first debt issuance under Republican Governor Bruce Rauner, who took office a year ago and is embroiled in a battle with Democrats in control of the legislature. The impasse has left the fifth-largest state without a budget six months into fiscal 2016.

Illinois’ enormous $111 billion unfunded pension liability and chronic structural budget deficit have driven up yields for its debt, making it more expensive for the state to borrow.

However, the state benefited with the newest issuance because the overall prevailing yields in the market have been relatively low.

“Market yields are lower, driving investors out for additional yield and Illinois offers them the opportunity to do that,” said Domenic Vonella, head of U.S. municipal bonds at Municipal Market Data (MMD).

Dan Heckman, senior fixed-income strategist at US Bank, said Illinois also benefited from low supplies of new bonds.

“Illinois picked a very good time to come to market,” he said.

The sale attracted nine bids. Its proceeds will be used mainly to finance transportation projects.

“The sale shows that there continues to be a lot of investor interest in our bonds despite the Democratic legislature’s failure to pass a balanced budget,” Rauner spokeswoman Catherine Kelly said.

Bank of America Merrill Lynch won the general obligation bonds with a competitive bid that resulted in an overall interest cost of 3.9989 percent for the state. The deal is structured with maturities between 2017 and 2041, with bonds in four maturities insured.

Yields in the issue topped out at 4.27 percent in 2041 with a 5 percent coupon, which is 161 basis points more than the 2.66 percent yield an AAA-rated issuer’s bonds would fetch in the U.S. municipal market, according to MMD’s benchmark scale.

Illinois has the lowest credit ratings and the widest so-called credit spread among the 50 states. The 161-basis-point spread over MMD’s scale is down from Illinois’ 170-basis-point spread in the secondary muni market heading into the bond sale. But the spread is wider than the 111 basis point spread for 25-year bonds in Illinois last sale in 2014.

Credit rating agencies warned last month that Illinois’ ratings, which are just three to four steps above the “junk” level, could be downgraded if the state fails to enact measures to address its fiscal problems.

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