Illinois Squeezes Out Savings on High-Grade Refunding

CHICAGO – Illinois captured about $55 million in savings on its $600 million refunding Tuesday of high-grade sales-tax backed paper despite the interest rate penalties tacked on by investors for the state’s fiscal woes.

The deal – under the Build Illinois bond credit -- achieved 9% in present value savings, state capital markets director John Sinsheimer said Wednesday.

Pricing data showed the bonds captured yields ranging from 0.50% with a 4% coupon in 2015 to 3.43% with a 5% coupon in 2026. The 10-year maturity carried a yield of 2.94 % with a 5% coupon.

The overall true interest cost on the issue was 2.70%. The transaction freed up for state use between $30 million to $40 million of reserves no longer required to be held because the refunding bonds were issued under a junior lien.

The spread over the triple-A Municipal Market Data benchmark on the 10-year maturity was 75 basis points over the opening rate of 2.19%. Yields on 10-year MMD scale rose to end at 2.26%.

Although steep, the spreads were in-line with past penalties assessed on the bonds, rated AA-plus by Fitch Ratings and AAA by Standard & Poor’s. Investors extract some cost for most local governments and state-related paper due to the Illinois name, even though repayment of the sales tax bonds is insulated from the state’s general obligation credit and is bolstered by strong coverage ratios from pledged revenues.

The state faced negative headwinds heading into Tuesday’s sale from the recent downgrades of its GO ratings – now in the low-single-A category with negative outlooks – and tougher market conditions, including rising municipal yields, difficulties among underwriters in assessing pricing levels, building supply, the large outflows of last week, and overall buyer hesitancy.

The Tuesday sale marked the largest single issue ever under the Build Illinois program established in 1985. Barclays was the senior manager. Northern Trust Securities and Guggenheim Securities LLC served as co-senior managers. A.C. Advisory was financial advisor.

The 10-year maturity in the state’s taxable Build Illinois deal that sold competitively last month carried a yield of 2.60%, almost 80 basis points over the 10-year Treasury that day. The spreads don’t provide a direct comparison, however, because the issue was taxable, sold competitively, and represented new money.

Though some investors are shunning Illinois paper, many believe the sales-tax bonds offer an attractive combination of extra yield and solid structure. Thomas Spalding, senior investment officer at Nuveen Investments in Chicago, said the firm was interested in the deal for its short duration funds.

“You get a little added spread but it’s a good credit,” Spalding said.

Sinsheimer and the finance team on a $1.25 billion GO sale slated for the last week of June hit the road next week for an investor roadshow as the state seeks to reassure investors following the downgrades after the General Assembly’s failed to solve a pension funding crisis during its regular session. A special session is slated for next week on the subject.

Siebert Brandford Shank & Co. LLC, Stifel Nicolaus & Co. Inc., and Wells Fargo Securities are co-bookrunners on the GOs. Peralta Garcia Solutions is financial advisor. 

The state’s 10-year paper has traded of late in the 140-150 basis point range over the MMD triple-A benchmark. The state will consider insurance on the bonds, although it typically reviews the economics of insurance on all its GO issues. Proceeds will fund ongoing capital projects.

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