CHICAGO — Illinois and the Regional Transportation Authority of Illinois were able to overcome a steady stream of bad fiscal news as they entered the market this week with deals that drew strong-enough investor interest to keep the risk premium on interest rates down.

Illinois’ debt manager and senior manager Citi credited an extensive international marketing campaign for the keen interest in the state’s $900 million taxable general obligation Build America Bond issue on Wednesday.

The RTA also attributed solid interest in its two-year, $140 million working cash note sale yesterday to its marketing efforts that sought to assure investors that sales taxes pledged to debt repayment provide solid debt-service coverage and go directly to the bond trustee. The RTA also benefited from fortuitous timing as rates shrunk on short-term debt.

The RTA sale — led by Bank of America Merrill Lynch with Acacia Financial Group Inc. as financial adviser — captured a rate of 2.842%. RTA chief financial officer Joe Costello said the agency had hoped to keep the interest rate under 3%, but was worried that its relationship with the state would drive the rate up. The sale was oversubscribed and came in under the 2.87% and 2.97 % rates the RTA paid on similar maturities in a note issue last year.

“We think people saw past the fact that we are related to the state and saw that our sales taxes and matching funds go directly to the trustee and so they will be paid on time,” he said. “Our team was really out there making sure investors were aware of that fact.”

The state is behind a record $323 million in aid to the RTA and note issue proceeds are needed to keep the Chicago region’s public transit buses and trains operating. Ahead of the RTA deal, all three rating agencies downgraded the system over the pressures posed by lackluster sales tax collections and the RTA’s exposure to the state’s liquidity crisis.

The RTA’s long-term debt and the notes are rated AA-minus with a negative outlook by Fitch Ratings, AA and stable by Standard & Poor’s, and Aa3 and stable by Moody’s Investors Service.

The market has digested a steady stream of more than $8 billion in Illinois paper this year amid a stream of negative fiscal news that includes rating downgrades, a budget deficit of $13 billion, and a backlog of bills that could hit $6 billion.

Lawmakers have pushed off decisions on steep cuts or tax increases sought by Gov. Pat Quinn as a November election looms. The latest negative news came from state Comptroller Dan Hynes last week declaring that the state ended fiscal 2010 on June 30 in its worst fiscal position ever.

Fitch rates the state’s GOs A with a negative outlook. Moody’s rates the state A1 with a stable outlook. Standard & Poor’s rates the state A-plus, on negative watch.

Ahead of the BAB sale, Illinois and Citi launched an extensive marketing campaign, hitting major U.S. cities, four European nations, and three Asian nations. The state received about $2 billion in orders from more than 90 institutional buyers, including 17 investors from nine countries with foreign buyers purchasing nearly 30% of the bonds, according to state debt manager John Sinsheimer.

“When we could sit down with investors whether here or overseas and talk about the Illinois economy and the GO bond structure, they could see the credit’s strengths. All the negative noise creates uncertainty but when we have an opportunity to clear some of those issues up, we get much better response from the market,” Sinsheimer said Thursday.

Repayment of GO debt service from state revenue enjoys a statutory priority. The state holds sovereign powers to raise revenues and reduce expenditures — even if current lawmakers are unwilling to act before November.

The true interest cost on the bonds after the federal interest subsidy was applied amounted to 4.56%, 57 points over Wednesday’s 30-year Municipal Market Data triple-A scale. The BABs mature from 2011 through 2016, with term bonds in 2021 and 2035. The bonds were priced to yield between 165 and 325 basis points over the comparable Treasury yields.

The average taxable yield came to 6.96% on the $500 million 2035 bond paying 7.34 %, a spread of 325 basis points to Treasuries. While the state paid a premium, it fell below the roughly 340 basis point spread Citi’s underwriting team initially anticipated from market indications.

The rates on the Wednesday state sale were up from a TIC of 4.39% on the state’s $300 million June sale that Citi submitted the winning bid on, with that deal’s 2035 maturity paying a taxable yield of 7.10%, 297 basis points over Treasuries.

While the Wednesday sale ended up about 28 basis points higher, BAB spreads have widened between 35 basis points and 40 basis points since mid-June, according to data from Wells Fargo.

Chicago-based Citi managing director Ray Kljajic said strong interest that came early from foreign buyers “helped set the tone.”

While domestically some investors worried over a saturation of Illinois paper, foreign buyers were worried more over liquidity, and so the growing perception of BABs as an asset class helped the state. From a credit perspective international investors are focused on solid fundamentals.

“They are more interested in the size of the economy and not so much in accounts payable like domestic buyers,” Kljajic said. “I think foreign investors were impressed with John Sinsheimer and the presentation and the state’s size and economy.”

Sinsheimer declined to say how much the state spent on the international road show that is covered under bond issuance costs. “We believe the offshore investors reduced our borrowing cost by 25 basis points, which in just the first year will save us more than $2 million,” he said.

The latest issue should wrap up the state’s new-money GO borrowing needs to support its $31 capital budget through the spring of 2011, Sinsheimer said. The state next week will sell $1.3 billion of GO certificates for cash-flow purposes and is planning on a $1.4 billion tobacco bond sale in November.

On the state deal, Morgan Keegan & Co. and PNC Capital Markets LLC served as co-senior managers. Acacia was financial adviser.

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