Illinois Sees Debt Deluge

An Illinois surge helped issuance volume in the Midwest rise more than 26% last year, to $83.8 billion.

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The number of issues in the region climbed 17.3%, to 5,027.

Borrowing picked up in the fourth quarter, when bond sales rose nearly 57% from a year earlier, to $27.7 billion, in part because issuers took advantage of the final days of the popular Build America Bond program.

Taxable BABs offered a 35% federal subsidy on interest costs, which helped lower borrowing expenses for state and local ­governments.

In keeping with national trends, BABs drove the 68.4% surge in taxable volume in the Midwest last year to $34.7 billion.

Tax-exempt debt rose only 6.8%.

Illinois was the Midwest’s largest issuer and posted the region’s largest borrowing spike. Issuance there leapt 74.2% last year, to $26 billion.

“Illinois was the name of the game in the Midwest,” said Michael Ross, a managing director at Morgan Keegan & Co. “That’s because of the BABs issuance and the pension obligation issuance, and because they were in the news as a credit.”

The state itself issued much of the debt, and it used most of the proceeds to cover overdue bills or looming payments. Its borrowing climbed 703%, to $8.6 billion in nine issues.

Bonding by state agencies dropped 39%, to $3.5 billion in 55 deals.

Illinois accounted for the region’s three largest deals, and issuers there accounted for six of the 10 largest issues.

The state has been trying to stabilize its finances while paying for infrastructure projects.

Its fiscal crisis — underscored by a deficit that could reach $15 billion and a bill backlog expected to reach $8 billion by the end of the fiscal year on June 30 — eased in January with the passage of an income-tax increase.

For many investors and credit analysts, the tax hike is a good move.

“Illinois is trying to do the right thing with the income-tax increase,” Ross said. “They are trying to solve the problem.”

Recent figures show a slow but steady increase in revenue and collections by many states, he said — in fact, the main problem heading into 2011 is steadying a market rocked by doubt in recent weeks.

“The biggest issue is calming the exaggerations that have been allowed to perpetuate in our market,” Ross said. “That’s the biggest challenge we have, and that’s going to be the theme.”

One of the first Midwest deals of last year was also its largest: a $3.5 billion sale of Illinois taxable general obligation bonds in early January.

The debt featured a five-year maturity, and the state used the proceeds to cover pension payments. JPMorgan, Loop Capital Markets LLC, and Goldman, Sachs & Co. were book-runners on the taxable deal.

Illinois made the year’s second-largest deal in December, when it priced $1.5 billion of tobacco bonds designed to pay down overdue bills.

The 17-year bonds were priced to yield 6.2% and were sold through the state’s Railsplitter Tobacco Settlement Authority.

Though the rate is significantly higher than similarly rated credits, the deal was considered well received, given the tobacco sector’s struggles.

The bonds are backed solely by the state’s share of the Master Settlement Agreement payments. Illinois received $284 million of payments last year and expects to receive $305 million this year.

In mid-February the state completed the region’s third-largest deal, a $1.5 billion refunding for debt-service savings.

“Illinois is responsible for the large jump” in Midwest issuance, said Molly Shellhorn, a research analyst at Nuveen Asset Management, which holds $290 million of Illinois paper. “The state, first thing in 2010, came out with a $3.5 billion [borrowing], then followed with five Build America Bond issues, then wrapped up with the $1.5 billion railsplitter at the end of the year.”

The state used most of the debt sale proceeds to cover operating expenses, though credit analysts generally frown on that practice, Shellhorn said.

The borrowing spree could continue this year. Illinois is set to price $3.7 billion of taxable GO bonds next week to cover 2011 pension payments. Lawmakers are also considering an $8.75 billion GO issue to pay off overdue bills.

But the state’s ambitious plans for financing infrastructure projects are on hold. Late last month, the Illinois Appellate Court struck down a 2009 law that established the funding streams to repay debt for the state’s public works capital program.

That action voided other pieces of legislation related to the capital program, including one that appropriated the actual funding for projects.

Last year, Illinois sold more than $3 billion of taxable general obligation BABs to raise money for the capital projects, and it had planned to sell about $1.5 billion of GOs this spring for such projects.

Another $2.5 billion of bonding was planned for fiscal 2012, depending on the availability of revenue that flows to the capital projects fund.

Most of that revenue — which comes from expanded gambling, as well as tax and fee increases on motor vehicle titles, license plates, liquor, candy and personal hygiene products — is caught up in the court ruling.

Illinois was not the only state to post a strong borrowing increase. Issuance rose 40% in Missouri, to $7.5 billion in 591 issues, 38% in Ohio, to $16 billion in 585 transactions, and 31% in Michigan, to $8.6 billion in 389 issues. As in Illinois, BABs drove the increases in those states.

Indiana, Iowa, and Wisconsin all reported dips in 2010 volume.

The region’s general obligation bond issuance increased more than 42%, to nearly $37 billion.

Revenue-backed borrowing rose 16%, to around $46.8 billion. State agencies were the largest borrowers; their issuance increased 3.5%, to $13.9 billion.

Public facility, transportation and general purpose bonds all posted robust increases.

Reflecting national numbers, health-care issuance fell in the Midwest by nearly 27%, to $8.96 billion. With some exceptions, health-care issuers could not issue BABs.

New money accounted for nearly $55 billion of issuance, a 39.1% increase over 2009. Refunding rose 4.3%, to $17.7 billion. 

Fixed-rate issuance rose 31%, to $74.7 billion, while floating-rate issuance with a short put fell 33.6%, to $5 billion, as issuers took advantage of the market’s low rates and avoided problems tied to liquidity and support of variable-rate debt.

As it did in 2009, the use of bond insurance and letters of credit fell dramatically last year. Just 277 issues were offered with insurance, and their value dropped nearly 29%, to $4.3 billion, after dropping 60.3% in 2009.

LOCs were used on only 59 deals, and their value fell 55.3%, to $2.3 billion, after falling 57.7% in 2009.

Morgan Stanley rose two spots in the league table to become the top senior manager in the Midwest, with 60 issues worth $9.2 billion. Its ascent knocked Bank of America Merrill Lynch down to second place. JPMorgan ranked third, managing 87 deals worth $8 billion.

Citi ranked fourth among senior managers, working on 47 deals worth $6.5 billion. It had ranked sixth in 2009 and first in 2008.

Barclays Capital ranked fifth in the region, and Goldman Sachs ranked seventh.

Regional firms rounded out the top 10. Robert W. Baird & Co. continuing its gradual three-year climb and ranked sixth. Piper Jaffrey & Co. fell five spots, to 10th place, leading 218 deals worth $2.8 billion.

Stifel Nicolaus & Co. and RBC Capital Markets ranked eighth and ninth, respectively.

Public Financial Management Inc. retained its top spot among financial advisers in 2010, when it worked on 307 issues worked $8.6 billion. Scott Balice Strategies finished second, working on 58 deals worth $4.4 billion. 

Peck Shaffer & Williams LLP won the top spot among bond counselors by working on 187 issues worth $5.7 billion. It knocked Chapman and Cutler LLP down to second place.

Dorsey and Whitney LLP and Kutak Rock LLP rounded out the top four. Squire Sanders & Dempsey LLP fell three spots, to sixth place.

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