CHICAGO - Illinois received nine bids on its $150 million competitive sale of general obligation bonds Tuesday, faring better in the level of interest from broker-dealers and yields than state officials had expected after a string of bad credit news.
JPMorgan submitted the low true interest cost bid of 4.73 %. Morgan Stanley submitted the high bid of 5.087% - a rate the state had viewed as a possibility based on the negative credit news. The deal was the first under new Gov. Pat Quinn, who took over as governor after the General Assembly removed Rod Blagojevich from office earlier this year.
The state benefited from an improving market and the pricing was solid, state officials said, given Moody's Investors Service downgrade of the credit to A1 from Aa3 last week.
Illinois' 2011 maturity will pay a 1.7% yield - a spread of 74 basis points to the Municipal Market Data's triple-A yield curve for the day - with a 3% coupon, compared to New York's 2011 maturity from its GO sale that is paying a 1.9% yield with a 2.25% coupon.
Further out on the scale, Illinois is paying a yield of 5.25% with a 5.25% coupon - also a 75 basis point spread to MMD - while New York is paying a 5.43 % yield with a 5.65 % coupon.
Illinois is rated A1 by Moody's, AA-minus on negative watch by Fitch Ratings, and AA-minus by Standard & Poor's, while New York is rated Aa3 by Moody's, AA-minus by Fitch, and AA by Standard & Poor's.
"The indication was that the big firms are back in the game, and in addition to the usual suspects, we had some bidders we don't see all the time," said William Morris of D.A. Davidson & Co., financial adviser on the transaction, referring to bids from such firms as Morgan Keegan & Co. and Jeffries First Albany Capital Inc. The state last year received seven bids on a competitive GO sale, and 11 a year earlier.
With broker-dealers paying heightened attention to credit analysis, state officials said they hoped that potential bidders would dig below the negative headlines of recent credit reports to notice the bits of positive news.
All noted the improved chances for resolving the state's $12 billion deficit, given the more friendly relationship between Quinn and the General Assembly, whose members removed Blagojevich following his December arrest on federal corruption charges.
Standard & Poor's moved this week to remove the state's top credit marks on its $1.4 billion of certificates from negative CreditWatch. Analyst Robin Prunty said the agency remains concerned over the state's strained liquidity but was reassured by its ability to repay the notes as they mature later this month and in June with the $6.1 billion in surpluses held in non-general fund accounts if needed.
Market participants said relationship building - with the state poised to significantly step up its borrowing, including negotiated sales - in the coming years also may have contributed to broker-dealer interest in the deal.
Quinn recently signed a $9 billion capital budget into law that relies on $3 billion of borrowing, and lawmakers hope to approve a total $26 billion capital plan during the current session. The governor's plan to eliminate a $12 billion deficit in the proposed $52.9 billion operating budget also depends on $2.2 billion of debt restructuring, and there is the possibility of pension bond borrowing.
The state's finance team will now focus its attention on two issues of notes totaling $2.3 billion to help pay down a backlog of bills before the fiscal year ends. Repayment is planned for next fiscal year after July 1. The proposal to use deficit borrowing contributed heavily to the Moody's downgrade.
Illinois' $1.4 billion short-term certificates drew little market interest last December when it sold after Moody's stripped the state of its top short-term ratings. The downgrade cut into the deal's appeal with money market funds.
