CHICAGO –  Illinois will take competitive bids on $500 million of general obligation bonds later this month in its first borrowing of the New Year and first test of market reaction to the General Assembly’s failure to overhaul pensions.

The 25-year bonds with a level principal and interest repayment will sell on Jan. 30, state director of capital markets John Sinsheimer said Friday. An offering statement will be published Tuesday. Public Resources Advisory Group is advising the state and Mayer Brown LLP and Burke Burns & Pinelli Ltd. are bond counsel.

Proceeds will finance transportation projects, school construction, and other projects under the state’s ongoing $31 billion capital program known as Illinois Jobs Now. The timing of the sale is driven by demand for funds.

“Capital projects are typically done in the spring and summer and we haven’t done a major capital financing since last spring so we need the funds in anticipation of the next construction season,” Sinsheimer said.

Some projects are underway but on winter construction hiatus while others will begin in the spring. “Construction will be up and running by mid-March for projects in the southern part of the state and by mid-April in the north,” Sinsheimer added. The state anticipates the possible need for at least $2 billion in borrowing this year to support capital spending.

The rating agencies have not yet issued reports on the new sale but state finance officials recently discussed the deal with analysts, Sinsheimer said. They also discussed the state’s new three-year budget and revenue projections which underscore the strain of rising pension payments on state coffers especially given the partial expiration in 2015 of an income tax increase and a $7 billion to $8 billion overdue bill backlog.

Earlier this month, after lawmakers adjourned without adopting pension reform, Fitch Ratings put Illinois on notice that its single-A GO rating faces a downgrade absent any action to solve its pension funding crisis. Fitch’s move to put the state’s GO credit on negative watch was the first rating agency reaction to the General Assembly’s failure to overhaul the pension system during their lame-duck session that ended earlier this month. Lawmakers could not settle on a plan despite mounting pressure from Gov. Pat Quinn, civic and business groups, and the public to chop the state’s $95 billion of unfunded liabilities.

Moody’s Investors Service recently revised its outlook on Illinois’ A2 general obligation rating to negative from stable. Standard & Poor’s rates Illinois’s $32.8 billion of debt A with a negative outlook.

The state won’t be conducting any special investor outreach or roadshow since it’s a competitive sale.

“I think the banks understand the state’s strong general obligation pledge. The municipal calendar has been fairly light and so we would expect that the banks are seeking inventory for their desks and would hope that translates into attractive bids,” Sinsheimer said.

The state last sold GOs in a small $50 million competitive issue with a final maturity of just 10 years because they funded technology-related projects. The state sold a large GO refunding in late April and its last new money GOs were in a March sale for $575 million.

The state has long paid a penalty to borrow because of its fiscal woes. While secondary trading prices provide an indication of the market’s perception of state paper, the new sale will provide a fresh data point. “We will be looking closely at the results to gage where spreads come in to give us an idea of where we stand with the market,” Sinsheimer said.

In the April refunding, the state captured a yield 65 basis points over the triple-A MMD on its shortest maturity, while the final maturity in 2025 came in at 171 basis points over MMD.

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