CHICAGO – Heading into a choppier market Wednesday, Illinois wrapped up the second piece of $6 billion in general obligation borrowing, luring buyers with rich yields.
The state saw its spreads widen on the $4.5 billion piece that was brought in a negotiated sale Wednesday compared to pre-marketing levels, and spreads on the short end saw a sharp widening from the $1.5 billion competitive issue last week.
But overall, traders called the sale a success since the market absorbed the bonds without deep price concessions. As with last week’s pricing, rich yields from a sovereign state drew buyers to the table.
“There’s a yield desert in the muni market and Illinois is providing a yield buffet,” said Brian Battle, director of trading at Performance Trust Capital Partners. “There were a lot of bonds and they came really cheap, about where we thought, and so once again Illinois is taking advantage of a historic time to issue a lot of debt.”
The state headed into a weaker market Wednesday as municipal yields were up at the market opening following a Treasury sell-off the day before. The state bumped up yields on various series from three to 15 basis points from the preliminary pricing scale distributed earlier Wednesday.
It was not immediately clear if any bonds were taken down by the underwriters.
The underwriters – led by Barclays – offered “good-sized cuts” in prices and they were “not unreasonable given the deal size and the rating,” said Battle.
Illinois is the weakest rated state with two ratings at the triple-B-minus lowest investment grade level. Passage of a $36 billion fiscal 2018 budget package that ended a two year budget stalemate and included $5 billion in tax hikes staved off a cut to junk.
Battle said the state also benefitted because the market didn’t see a sell off ahead of the deal to accommodate the bonds that marked the market's largest offering of the year and largest from Illinois since its $10 billion 2003 pension GO sale.
The state sold three- to 11-year maturities with each series offering $500 million. It followed the offering of one, two, and 12-year maturities last week. The state will use proceeds of the $6 billion to pay down a nearly $16 billion backlog that ballooned during the budget impasse, some of which carries 9% to 12% late payment penalties.
The shortest maturity for three years offered a yield of 2.53%, a 141 basis point spread to the Municipal Market Data’s AAA benchmark and 51 basis points more than the BBB benchmark. That was up 15 basis points from preliminary wire.
The four year series paid a yield of 2.85%, 161 basis points over the AAA and 93 bp over the BBB. That was up 10 bp from the preliminary scale.
Both series came at wider spreads than outlined in the pre-marketing wire distributed late last week that had spreads initially at 115 on the three year and 135 on the four year.
The spreads also came wider than where the state’s three- and four-year bonds have recently been trading at 115 bp and 135 bp, respectively, to the AAA. They also marked a sharp widening from where spreads landed in the competitive deal last week. The one- and two-year series in those deals saw spreads of just 70bp to the AAA.
The 10-year yield of 3.74% represents a 184 bp spread to the AAA and a 90 bp spread to the BBB. That was six basis points wider than the preliminary scale.
The longest 11-year series paid a yield of 3.77%, 172 basis points more than the AAA and 82 bp over the BBB. The final yield was three basis points higher than the preliminary pricing scale.
The two series in the pre-marketing scale last week had offered them at a 175 bp spread on the 10-year and 170 bp spread on the 11 year.
The state’s 10- and 11-year bonds have recently traded with the 10-year at 172 bp and the 11-year at 170 bp and that was near where the long 12-year bond landed – at a spread of 166 bp over the AAA -- in the $1.5 billion deal.
The Rauner administration said the state received orders from more than 100 institutional investors on Wednesday’s sale.
“We are pleased by the investor support on such an important financing for the State,” said state capital markets director Kelly Hutchinson. The state locked in a combined cost of borrowing of 3.5 % on the two sales totaling $6 billion to pay down the backlog. The state will return to the capital markets later this year with a $750 million competitive GO sale.
All series carried 5% coupons with the exception of a split 2026 which carried a 3.25% coupon.
The bonds were priced at a premium with prices of $107 to $115 with the exception of a discounted price on the 2026 3.25% coupon.
The 2025 maturity was also split with a $25 million piece carved out that carried coverage from Build America Mutual Assurance Co. and paid a yield of 2.87%, down from the 3.62% yield on the remainder of the maturity.
The other senior managers along with bookrunner Barclays were Bank of America Merrill Lynch, Citi, JPMorgan, Loop Capital Markets, and Siebert Cisneros Shank & Co.
Illinois paid a 200 bp spread on the 10-year in its last GO sale for $480 million in November 2016. It saw spreads of 193 bp on a $1.3 billion GO refunding in an October 2016 sale and 185 bp spread on a $550 million June 2016 sale. Spreads have fluctuated depending on fiscal developments and were hovering between 273 and 292 bp until July after the budget passed when they dropped to about 200. They had further narrowed leading up to the sale.
Ahead of the sale, Triet Nguyen, head of public finance credit at NewOak, wrote in the firm’s MuniCredit Insights publication that the 12 year final maturity “helped” the deals by placing them “squarely in the sweet spot for retail and conservative institutional demand.” And while the increased debt load concerns NewOak, there’s some comfort in the big drop off in state debt service in 2020 and again in 2033 as pension related borrowing is retired.
Nguyen added after the sale results Wednesday that “it looks like the Illinois deal went reasonably well, as we expected. Apparently, the banks were a little too aggressive with last week’s competitive deal, at least on the short end of the curve, but I think they knew that."
Chip Barnett contributed to this story.
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Updated October 25, 2017 at 5:26PM: Updated with a comment from the Rauner administration.