CHICAGO — Illinois held its ground with the market Tuesday as it completed an $800 million general obligation issue that captured yields in line with the interest rate penalties the fiscally challenged state’s paper is assessed in the secondary.
The state saw spreads on the 10-year maturity in the deal’s tax-exempt piece come in at 141 basis points over the comparable top-rated municipal benchmark.
It’s a rate similar to secondary market trading figures for state paper and nearly 10 basis points better than market participants had assigned to the deal a day earlier.
The sale’s results marked a feat for Illinois given its decision in late January to pull a $500 million issue amid the threat of steeper interest rate penalties that would have further dinged the state’s reputation. It faced higher-than-expected interest rates at that time due to more difficult market conditions, unsold balances on some dealers’ books from the previous week, and negative headline pressure from recent credit deterioration.
Standard & Poor’s had just lowered the state to A-minus and assigned a negative outlook, making it the lowest-rated state due to inaction on reforms needed to rein in skyrocketing annual pension payments and $95 billion of unfunded obligations.
Indications from broker-dealers ahead of the January sale suggested bids could come in at between 160 and 180 basis points over the muni benchmark for top-rated 10-year securities, while the state’s 10- year paper was trading in the 140 to 150 basis point range.
The wide spreads between bids based on those early indications ahead of the January sale also worried the state’s finance team. Some traditional bidders also indicated they might sit out the transaction over the bidding rules.
Illinois capital markets director John Sinsheimer and his advisors pulled the January sale, saying they wanted to give the market more time to digest negative credit action.
In the interim, the state bolstered investor outreach, tweaked the bidding rules, and chose to sell during a week that followed one with a light calendar.
“Illinois benefitted from a few large buyers that submitted presale orders to a few of the major competitive underwriters ahead of the sale. The market is on better footing now having just gone through a correction versus late January when the market was then undergoing a back-up in yield,” Matt Posner of Municipal Market Advisors said of Tuesday’s results. “This sale should be considered a win for the state [and] positive for the credit in terms of market acceptance.”
“Nothing substantive has changed in the state. It’s not as if they have solved a lot of their problems. They had better market timing,” said Howard Cure, director of municipal research at Evercore Wealth Management in New York.
The state received nine bids on each series Tuesday. It typically receives between seven and 10 bids on competitive deals. Bank of America Merrill Lynch submitted the winning bids for each of the two series sold: $450 million of tax-exempt GOs and $350 million of taxable securities.
“We had very tight bids,” Sinsheimer said. “The level of the TIC and the spreads between the high and low bids, which tightened, support the rationale for pulling the deal in January. By going out and doing extensive outreach we obviously had a positive impact on the results.”
On the tax-exempt series, yields ranged from 68 basis points to 145 basis points over the triple-A municipal benchmark with the spread on the 10-year at 141 basis points. Illinois captured a true interest cost of 3.92%, the same as its last comparable competitive GO sale in early 2012.
Yields on the taxable series ranged from 97 basis points to 245 basis points over comparable Treasuries. The TIC of 4.97% was improved over the 5.29% on the state’s last comparable offering in January 2012.
Negative headlines have subsided and individual pension-reform measures have advanced in the General Assembly, signaling to some that the issue has momentum. Still, a sweeping deal on pension reform remains elusive despite pressure from Gov. Pat Quinn, investors, analysts, and local governments and universities who all pay higher interest rates simply for being located in Illinois.
“Time is running out for the state to do something on pensions, and the other question is whether they are going to extend the income tax,” Cure said. A 2011 income tax hike starts to expire in FY 2015.
Sinsheimer said the state was pleased with the TICs but acknowledged the interest rate penalties imposed on the state. “The bottom line is we continue to pay higher spreads than we ought to due to the lack of a resolution on pension system reforms,” Sinsheimer said.
The state intends to return to the market with a new-money negotiated sale of about $1 billion between May and July to finance capital projects.
Proceeds of the sale Tuesday will replenish a depleted capital fund as spring construction season kicks into high gear. A smaller sales-tax-backed deal is also in the works.
Fitch Ratings assigns an A rating to the state’s $27 billion of GO debt, including the new issue, and has a negative watch. Illinois’ GOs are rated A2 with a negative outlook by Moody’s Investors Service.
