Illinois Spreads Shrink in Primary

CHICAGO - Illinois sold $250 million of general obligation bonds Thursday in a competitive sale that saw some further narrowing of the state's interest rate spreads.

State officials acknowledged market conditions such as demand amid low supply have helped curb its interest rate penalties but they believe some of the latest improvement is due to Gov. Pat Quinn's recent announcement that he hopes to make an expiring income tax hike permanent.

"The market has spoken today and clearly investors feel, as the ratings agency has said in recent days, that Gov. Quinn's budget 'provides a basis for the state to achieve fiscal balance,'" acting budget director Jerry Stermer said in a statement. "The rating agencies also have noted the positive steps our administration and the General Assembly have made in passing a comprehensive pension reform bill and paying down the backlog of bills."

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 .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. Assured Guaranty is insuring the 2033 to 2035 maturities, according to the bid sheet.

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%.

Thomson Reuters MMD said in its market commentary Thursday that on the long end spreads were between five and 10 basis points tighter than recent trading while shorter maturities reflected recent trading levels.

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.

The February deal priced before Quinn announced his intentions on the expiring income tax and the June 2013 sale occurred before pension reforms passed in December.

A Citi-led syndicate submitted the cover bid with a TIC of 4.1203%. Wells Fargo Securities submitted the next lowest bid with a TIC of 4.129%. Goldman Sachs submitted a bid with a TIC of 4.1842% and Jefferies for 4.2121%. A total of eight bids were received, according to the state.

Public Resources Advisory Group served as advisor to the state while Chapman and Cutler LLP and The Hardwick Law Firm LLC are bond counsel.

The state's TIC compares to one of 4.46% on its $1 billion sale in February and 5.05% on its $1.3 billion issue last June. The state put a price tag of $10 million on the savings it expects on the current deal based on a comparison to rates in the February sale.

The state's low single-A ratings, the weakest among states, have remained unchanged although Standard & Poor's shifted the state's outlook to developing after the pension reforms passed. Standard & Poor's said this week in a special commentary that legislative decisions over the next 50 days are pivotal to stabilizing the state's credit.

Investors have been more generous in shrinking the state's interest rate penalties since December as market confidence in the state's political will to tackle its fiscal strains rose. Many had expected that Quinn would seek to make the tax hike permanent ahead of its partial expiration on Jan. 1 and several said they've been heartened by comments from the General Assembly's Democratic leaders endorsing Quinn's proposal.

Proceeds of the sale will finance school, road, and bridge projects from the state's ongoing $31 billion capital program. The state intends to return to the market this spring with another $750 million of GO issuance in a negotiated sale.

Quinn on Wednesday unveiled a six-year $8.6 billion transportation program that includes public transit improvements and plans to improve 1,845 miles of highways and 384 bridges. The plan relies on a mix of federal, state, and local revenue including some funds from the ongoing $31 billion capital program.

Quinn is asking the General Assembly's leaders to nominate members for a bipartisan working group to craft a new capital program as a followup to the existing five-year-old one as it winds down.

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Illinois
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