CHICAGO - After pricing $1 billion in general obligation bonds Thursday, Illinois claimed $60 million in interest savings it attributed primarily to a recently enacted pension overhaul.
That's the saving state officials say came from the reduced penalty investors demanded on the GO deal compared to earlier deals.
Illinois and bookrunner Citi lowered pricing scales early Thursday from Wednesday's pre-marketing indications due to strong demand highlighted by $5.5 billion in orders from about 109 investors including six insurance companies and some names the state hasn't seen of late, said state capital markets director John Sinsheimer.
The bonds were re-priced a second time to the state's benefit to reflect demand amid scant supply.
"When you open a book and have more than $5 billion and a half of orders, things get better," Sinsheimer said. The final sizing on the sale was $1.025 billion.
The deal's 10-year serial maturity paid a yield of 3.81%, repriced from 3.87% earlier in the day, representing a roughly 129 point spread to the Municipal Market Data benchmark 10-year yield.
That compares favorably to spreads of more than 160 basis points on the 10-year maturity in its most recent comparable $1.3 billion tax-exempt sale in June.
On the June sale, the state's uninsured 10-year maturity paid a yield of 4.46%, more than 160 basis points over MMD. Market volatility and the impact of Illinois' large deal drove MMD on the day of pricing to 2.56% from 2.81% which would put the spread at more than 180 basis points.
The state in its comparisons is using the 2.56% figure and highlighting the 50 basis point improvement over the June sale, forming the basis of its claim for $60 million in savings over the 25-year life of the bonds priced Thursday.
Spreads to MMD reflected the roughly 50 basis point improvement Illinois has seen in secondary market trading since passage of a sweeping pension overhaul in early December, responding to one of the major concerns investors and analysts held about the state's long-term fiscal prospects.
In June, Gov. Pat Quinn's administration put a price tag of $130 million on the added borrowing costs over the 25-year life of the $1.3 billion issue due to several rounds of downgrades in recent years.
The improvement in spreads on the state's final 25 year maturity, in a term bond on Thursday's sale, was about 30 basis points, but a direct comparison to the June sale is difficult because of differences in size.
The state will pay a true interest cost of 4.46% on the sale compared to 5.05% on the state's June issue. The $60 million in savings is estimated over the life of the 25-year bonds.
"We are gratified by the support investors have shown in the state and in the steps we have taken to stabilize Illinois' finances, most notably the passage of the comprehensive pension reform plan," Sinsheimer said.
In addition to led manager Citi, Robert W. Baird & Co. Inc., George K. Baum & Co., and Fifth Third Bank were co-senior managers and another five firms rounded out the team as co-managers. Peralta Garcia Solutions is financial advisor.
Proceeds will finance projects under the state's ongoing $31 billion Illinois capital program.
Investors have praised the state for moving to stabilize its pension system, but further action could be needed if unions prevail in challenging the constitutionality of the reforms.
Rating agencies have held the state's GO ratings steady at the low single-A level as they await the results of the legal challenge and word on how the state will make up for lost revenue expected when the 2011 income tax hike begins to sunset next January.
Investors had also rewarded the state for the passage of reforms by reducing its typical interest rate penalty on a taxable GO issue that sold just after the pension reforms passed.
