Illinois’ $3.7 Billion Taxable GO Sale Stands Out in a Thin Primary

A $3.7 billion taxable Illinois general obligation sale this week is the largest single deal to test the fickle and fiscally challenging waters of the municipal market so far this year. It will be the standout offering in an otherwise lifeless primary.

“The primary calendar for next week is looking like another modest week of issuance,” Randy Smolik wrote in the daily Municipal Market Data commentary. Ipreo LLC and The Bond Buyer expect volume to hit $6.090 billion — roughly $2 billion less than the typical amount — but up from last week’s revised $2.715 billion, according to Thomson Reuters.

The light issuance coincides with a challenging market for issuers and investors lately.

The Illinois deal, which is slated for pricing on Thursday by Morgan Stanley, comes on the heels of a report that low short-term rates caused a 28% decline in the investment income of state and local municipalities for fiscal 2010 compared to 2009, according initial figures from Merritt Research.

Though investment income is a small percent of municipalities’ revenue, the reduction is adding pressure at a time when most government revenue sources are already under significant stress.

Last Wednesday, members of the House Oversight and Government Reform Committee opposed federal bailouts for financially strapped municipal governments and bankruptcy protection.

In this environment, municipal bond mutual fund outflows continue to be sizable, but have eased from the recent record $4 billion surge in the week ended Jan. 19.

Investors withdrew $1.16 billion for the week ending Feb. 9, down from $1.07 billion in the week ending Feb. 2, according to Lipper FMI.

The Illinois deal enters the market following last week’s flat to slightly firmer tone as the scale for 30-year, triple-A general obligation bonds ended at a 4.90% at the close of trading Friday, according to MMD.

That was down from Monday when it closed at 4.92%.

Market sources said they think the Illinois deal will be well-received, despite conditions in the market.

“The reception will be pretty decent as it’s a taxable loan, which will provide a ton of yield,” said a Chicago trader.

“The demand will be driven by the fact that Illinois is a sovereign state which just raised income taxes” to help plug its budget gap, he added.

Rated A1 by Moody’s Investors Service, A-plus by Standard & Poor’s, and A by Fitch Ratings, the debt will fund or reimburse a portion of the state’s obligation to make contributions to its pension fund and the pay costs of financing, including, the costs of issuance of the bonds, according to the preliminary official statement.

The bonds will mature on March 1 in a structure that includes bonds maturing from 2011 to 2019.

Earlier this month, the Illinois Supreme Court put on hold a Jan. 26 state appeals court ruling that voided taxes and other revenue earmarked to pay off bonds for a $31 billion capital improvement program.

Illinois has issued $2.23 billion of bonds since 2009 for the program to improve roads, bridges, schools and other infrastructure, according to a spokeswoman for the state’s budget office.

“I think that sovereign states defaulting are way overblown given other alternatives they have, like selling assets,” said another Chicago trader. “I do think that eventually Illinois will suffer from greater spreads as the market will extract a greater premium for their fiscal woes.”

In other market activity, a pair of Pennsylvania deals are on tap — one in the transportation sector and one in the health and higher education sector.

The Allegheny County Port Authority is planning to sell $263.2 million of transportation revenue bonds in a negotiated deal scheduled to be priced by RBC Capital Markets LLC.

The bonds are rated A-plus by Standard & Poor’s and AA-minus by Fitch.

A $150 million sale of revenue bonds from the Pennsylvania Health and Higher Educational Facilities Authority is also planned for sale this week by Bank of America-Merrill Lynch. The firm could not disclose the exact date at press time on Friday.

The bonds are rated Aa3 by Moody’s and AA-minus by Standard & Poor’s, but Bank of America said the maturity structure was also being finalized late last week.

Two Washington issuers also gearing up for a trip to market.

The larger of the pair of deals is a $200 million sale of GO bonds from the Bellevue School District #405 expected to price on Tuesday.

The bonds, which are rated Aaa by Moody’s, are structured to mature from 2012 to 2030.

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