CHICAGO — Illinois paid lower yield penalties on its first bond sale after lawmakers passed legislation to restructure a pension system burdened with $100.5 billion of unfunded liabilities.

Bank of America Merrill Lynch submitted the winning bid Thursday with a true interest cost of 5.397% on the state's $350 million competitive taxable general obligation bond sale. The state received a total of eight bids, in line with the typical seven to 10 bids it receives on competitive transactions.

The yields ranged from 0.75% on the short end to 5.65% on the long end. The two-year maturities priced at a yield of 1.28%, 95 basis points above a Treasury rate of .33%. The spread on the state's final 2038 maturity was about 175 basis points more than the 30-year Treasury rate of 3.90% Thursday.

The state's long taxable GO paper had been trading in the secondary at a spread of more than 200 basis points prior to last week's passage of the pension legislation.

The deal was comparable to a $350 million taxable GO issue Illinois sold in April that was part of a an $800 million sale with a $450 million tax-exempt piece.

In April the spread over Treasuries on the taxables ranged from 97 basis points to 245 basis points.

The state received nine bids on the taxable bonds sold in April. B of A Merrill won the bidding with a true interest cost of 4.97%. The bonds were priced with coupons ranging from 1.1% in 2014 to 5.52% in 2038.

The spread on the state's 25 year bond in April was 241 basis points more than the 30-year Treasury rate of 3.11% that day.

The state was rated one level higher by Fitch Ratings and Moody's Investors Service at the time of the April sale. Downgrades to A-minus levels across the board followed the General Assembly's inaction on pension reforms in late spring.

Illinois officials said the spread on the TIC to 10-year Treasuries of about 250 basis points Thursday compared favorably to the spread on the TIC for the April sale of about 300 basis points, according to state budget spokesman Abdon Pallasch. Spreads narrowed even though the state has lower bond ratings than it did for the April issue.

"That should save Illinois taxpayers in excess of $20 million in interest costs over the 25-year life of the bonds, compared to the rate the state received in April," Pallasch said.

Investors have cast a positive view on the state's passage of a pension overhaul after two years of political gridlock. Spreads on the state's tax-exempt bonds have also narrowed, with its 10-year paper trading at 158 basis points over the Municipal Market Data's benchmark compared to a previous spread of 173 basis points, according to ThomsonReuters MMD.

Ahead of the sale all three rating agencies affirmed the state's A-minus-level ratings, with Fitch Ratings and Moody's Investors Service maintaining negative outlooks. Standard & Poor's shifted the outlook to "developing" from "negative" Tuesday. The rating is the weakest among states.

Backers say the pension restructuring approved by lawmakers on Dec. 3 will trim $160 billion from scheduled payments to the system, about $21 billion from $100.5 billion of unfunded liabilities, and $1.5 billion off upcoming annual state contributions. Unions are preparing a legal challenge to the benefit cuts.

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