CHICAGO – Rising rates and worries about Illinois' fiscal woes drove up its borrowing costs Wednesday compared to its last primary outing.
The state still fared better in the competitive $500 million general obligation bond sale than its recent secondary trading levels amid strong demand for the high-yielding paper.
Municipal Market Data’s analyst team noted the upside and downside in its market report with the results showing “narrower spreads against recent trading” though Illinois saw “much tighter” spreads in its last GO sale in November.
Bank of America Merrill Lynch won the competitive bidding on the two tranches, one for $450 million that matures in 2043 and a second for $50 million that matures in 2028.
The state received nine bids on the larger A series and 11 bids on the smaller B series. Combined the sale’s true interest cost, or TIC, was 4.72%. The TIC on the state’s November sale was 4.29%.
“We are very pleased with the strong response that the State received on today’s competitive bids, particularly given the recent volatility in the municipal bond market. These transactions have allowed the state to move forward with funding essential capital and infrastructure needs,” Illinois Director of Capital Markets Kelly Hutchinson said in a statement.
Interest rates are up market-wide since the late November sale and the state’s secondary trading spreads have widened amid worries about whether budget gridlock will return with statewide elections looming, how the state will eventually deal with a $130 billion pension tab, and whether the state can hold on to its low investment-grade ratings.
“The spreads came in at a fair level, not cheap and not rich,” said Brian Battle, director of trading at Performance Trust Capital Partners. “It’s not surprising that the deal was well-received. It’s a state credit and it has very high yields.”
Selling competitively at Illinois’ weak rating level can pose a challenge, especially in a rising rate environment amid a Treasury sell-off, Battle said. “The deal has had decent follow through in a day that suffers from higher Treasury yields,” although the syndicate is still holding some balances, he said.
State law requires that a portion of GOs be sold competitively.
The 10-year yield in both series Wednesday landed at 4.55%, a 205 basis point spread to where the Municipal Market Data’s AAA benchmark was at early in the trading day and a 121 bp spread to the BBB. The 10-year in the larger tranche, however, sold at a premium price and a 6% coupon, which can impact spreads.
The state’s 10-year has most recently traded at about a 210 bp spread to the AAA.
The 10-year spread is up from where the November 2017 sale landed at 170 bp when the market rewarded the state for the end to a two-year budget impasse and passage of $4.5 billion in tax hikes over the summer. In its most recent sales before the gridlock ended, the state saw spreads of 200 bp and 193 bp in late 2016.
The long 25-year maturity in the Wednesday sale landed at 4.88%, a 185 bp spread to the AAA early in the trading day and a 102 spread to the BBB. The state’s longer bonds have recently traded at a 195 bp spread and in the November sale came in around a 163 bp spread according to MMD.
The 6% coupon on some maturities in the $450 million tranche gave the paper a bump by making them unique, Battle said.
Investors favor higher coupons in a rising rate environment or if a credit is at risk because they offer future price protections. The premium price gives Illinois more proceeds.
Ahead of the sale, Fitch Ratings affirmed the state’s BBB rating and negative outlook, Moody’s Investors Service affirmed its Baa3 rating and negative outlook, and S&P Global Ratings affirmed its BBB-minus rating and stable outlook.
Chapman and Cutler LLP and Pugh, Jones & Johnson PC are bond counsel and PFM Financial Advisors LLC is municipal advisor.
Proceeds will fund capital projects under the state’s capital plan to finance information technology projects, and pay cost of issuance of the bonds.
--Chip Barnett contributed to this story