CHICAGO – With nearly $500 million in spring transportation projects planned, Illinois will sell $800 million of debt Tuesday with the hope that buyer demands for steeper interest rate penalties have softened after a two-month delay in the state’s first bond offering of the year.
The state will sell the general obligation bonds competitively through PARITY. Mayer Brown LLP and Burke Burns & Pinelli Ltd. are bond counsel and Public Resources Advisory Group is advising. Ahead of the sale, rating agencies affirmed the state’s ratings. The deal offers $450 million of tax-exempt paper and $350 million of taxable securities.
Proceeds will finance capital development, school building, and transportation projects included in the state’s ongoing $31 billion Illinois Jobs Now program. Gov. Pat Quinn announced $486 million in road and bridge projects last week. Capital fund coffers are running low. “Illinois has a world-class transportation system and we are making it even stronger by carrying out one of the largest spring construction programs ever,” Quinn said.
The deal comes after a series of downgrades due to the state’s massive unfunded pension obligations and bill backlog of up to $9 billion.
Fitch Ratings assigns an A to the state’s $27 billion of GO debt, including the new issue, and has the rating on Watch Negative. The state’s GOs are rated A2 with a negative outlook by Moody’s Investors Service and A-minus with a negative outlook by Standard & Poor’s.
Fitch said the negative watch “reflects the historical inability of the state to address its large and growing unfunded pension liability” and that “failure to achieve meaningful results would lead to a downgrade of the rating.”
The state has $95 billion of unfunded pension liabilities for a 40.4 % funded ratio and payments will rise by $1 billion in fiscal 2014 to $6 billion.
“While it is unusual for a state rating to fall into the ‘BBB’ category, lack of action on pension reform and upcoming budget challenges could result in further credit deterioration, particularly if it translates into weaker liquidity,” Standard & Poor’s warned. It outlook reflects a two-year view.
Various reform proposals advanced in the Illinois General Assembly late last month ahead of a two week break, offering signs of progress but agreement on a sweeping plan remained elusive. If lawmakers accomplish their task, rating analysts said they don’t anticipate an immediate fiscal impact, due to the expected legal challenge by unions.
The state’s fiscal struggles are heightened by the partial expiration in fiscal 2015 of a state income tax hike. “Because fiscal 2014 marks the last year before recent income tax increases are mostly phased out, Illinois faces an unsustainable combination of rising pension contribution needs and declining tax revenues,” Moody’s wrote.
The state’s credit strengths are led by its large and diverse economy, its sovereign powers to raise revenues and the priority debt service enjoys over other expenditures under state statutes. The state funds debt service one year ahead on a rolling 12-month basis.
The state’s sale is among a primary market calendar of nearly $5 billion, up from $3 billion last week during an abbreviated holiday week. On the negotiated calendar, $2.32 billion is slated for sale and $2.62 billion will come competitive.
The sale comes about two months after the state delayed a $500 million issue as early indications suggested that buyers would demand a steeper than expected interest rate. The concern stemmed from a combination of market conditions and headline risks over negative credit action.
In recent weeks, state capital markets director John Sinsheimer has courted investors, updating them on the proposed $36.9 billion budget and pension proposals. The state also dropped a bidding feature that had dampened the interest of some broker-dealers because of the ability for firms to revise bids. It also settled on a week that follows an abbreviated calendar. Broker-dealers ahead of the state’s January sale date were still trying to place inventory from the prior week’s sales.
The state also has promoted the end of a Securities and Exchange Commission probe that resulted last month in the SEC charging the state with securities fraud for misleading investors on the financial risks posed by its pension funding plan on sales between 2005 and 2009. The state and SEC settled the charge without fine or penalty.
Several market participants said the state should benefit from a recent drop in yields and a narrowing of the penalty on Illinois paper in secondary trades. Tax-exempt state paper has traded between 130 and 150 basis points over the Municipal Market Data benchmark on 10-year maturities over the last year with the spread narrowing of late. Illinois traded weaker Monday ahead of the auction in the more volatile odd-lot trades. A dealer bought Illinois taxable 6.9s of 2035 at 5.93%, seven basis points higher than where the bonds were bought Thursday. A dealer sold Illinois taxable 6.63s of 2035 at 5.70%, up four basis points from Thursday. Another dealer sold to a customer Illinois taxable 7.1s of 2035 at 5.77%, two basis points higher.