CHICAGO — Illinois will return to the market Thursday with a $750 million general obligation sale hoping to capitalize on good market conditions and the same improved investor appeal that lowered borrowing costs on an issue earlier this month.
The state had been planning to return to the market in late April or May after its $250 million issue earlier this month, but decided to act sooner rather than later.
"The market is good, so why wouldn't we want to get the deal done, especially after the results with the last issue," state capital markets director John Sinsheimer said Thursday.
The deal joins a calendar of more than $7 billion in supply expected during the week, after scant supply during the preceding week. The state's last sale faced less competition on a more than $4 billion calendar. The state's still high yielding GOs and the perception that its credit has stabilized should draw attention.
Wells Fargo Securities is the bookrunner with J.J.B. Hilliard, W.L. Lyons LLC/Melvin & Co. LLC, Mesirow Financial Inc., and U.S. Bancorp serving as co-senior managers. The firms were next up in the state's rotating list of underwriting pools. Hilliard and Melvin had submitted a joint bid in the request for proposals process. Another five firms serve as co-managers.
Public Resources Advisory Group is advising the state. Chapman and Cutler LLP and The Hardwick Law Firm LLC are bond counsel and Faegre Baker Daniels LLP is underwriters counsel.
The bonds mature in 25 years with proceeds providing ongoing funding for the state's $31 billion capital program known as Illinois Jobs Now. The deal marks the state's fourth so far this year and should cover its capital spending needs for the remainder of the year, although a final issue late in the year is a possibility, Sinsheimer said.
Illinois sold $1 billion of GOs in February, followed by a $400 million issue of taxable sales-tax backed bonds in March and then $250 million earlier this month. The state has seen its steep interest rate penalties narrow in its primary offerings thanks to limited supply and favorable reaction from investors over recent fiscal strides.
The state passed a pension overhaul in December aimed at stabilizing its weak system that carries $100.5 billion of unfunded liabilities. The state's ratings have remained at the lowest rung among states in the low-single-A category. Analysts remain worried over whether the pension reforms will pass a legal challenge underway and how the state will deal with the looming rollback of a 2011 income tax on Jan. 1. The state's structural budget imbalance is highlighted by a $5 billion bill backlog expected to be carried over into the next fiscal year.
Gov. Pat Quinn in March unveiled a recommended fiscal 2015 budget that relies on making the income tax rate hike permanent. If rates begin to expire on Jan. 1 as scheduled, the state would lose nearly $2 billion in the fiscal year and $3 billion in fiscal 2016. Quinn has argued the state can't afford to lose the revenue without cutting deeply into education and social services or driving back up the bill backlog that's been whittled down from a high of $9 billion.
Buoyed by Quinn's position and support from the General Assembly's Democratic leaders for making the tax rates permanent, the state saw its spreads shrink even further on its sale earlier this month.
The 10-year bond priced at a spread of 95 basis points to the Municipal Market Data top-rated benchmark of 2.47% when the market opened Thursday. That compares to a spread of 129 basis points on a GO sale in February when its 10-year serial maturity paid a yield of 3.81%. The February rate compared favorably to spreads of more than 160 basis points on the 10-year maturity in the state's previous most comparable sale in June.
Bank of America Merrill Lynch, with Oppenheimer serving as a co-manager in its syndicate, submitted the winning bid at a true interest cost of 4.0816%. The yields ranged from 0.60 on the 2015 maturity to 3.42 % on the 10 year maturity, 4.45% on an insured 20 year maturity, and 4.54% on the final 25 year maturity.
Fitch Ratings and Moody's Investors Service assign a negative outlook to the state. Fitch on Thursday affirmed the state's existing GO ratings. Standard & Poor's assigns a "developing" outlook and said in a special commentary earlier this month that legislative decisions over the next 50 days are pivotal to stabilizing the state's credit.
"From a credit standpoint, the state of Illinois is approaching another critical juncture, as state policymakers face chronically high payables with pending statutory reductions in personal and corporate income tax rates," says the report authored by analyst Robin Prunty.
Oliver Renick contributed to this story.