Spread penalty on Build Illinois sales tax bonds reflects downgrades

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CHICAGO – Illinois drew strong interest but paid a higher interest penalty on this week's pricing of sales tax-backed Build Illinois bonds compared to the credit's last outing in 2016.

The state took competitive bids on a $115 million tranche, a $125 million tranche, and a $10 million taxable series. The first two series of the new money, junior-lien bonds secured by the state’s share of sales tax collections carried a final maturity in 2043.


Bank of America Merrill Lynch won the $115 million series with true interest cost of 4.16%. The tranche received 10 bids, according to Gov. Bruce Rauner’s administration. UBS Financial Services Inc. won the $125 million series with a true interest cost bid of 4.27% among 11 bidders.

PNC Capital Markets won the taxable tranche, with maturities through 2028, with a true interest bid of 4.09% beating four other bids.

“Given the recent volatility in the municipal markets the state is pleased to see significant participation evidenced by the number of bidders,” the state budget director, Hans Zigmund, said in a statement referring to the rise in municipal and Treasury interest rates.

The bonds carried an A-minus rating from Fitch Ratings, a newly assigned AA-plus rating from Kroll Bond Rating Agency, and S&P Global Ratings' AA-minus.

This week's was the first Build Illinois sale since S&P cut the program’s AAA rating in 2017 and Fitch dropped it five notches from AA-plus in May. The Fitch action followed a criteria change that limits the situations in which a state's dedicated tax security can be rated without regard to the state's general credit quality.

The 10-year maturity in the BAML-won series that carried coverage from Build America Mutual Assurance Co. landed at a 3.50% yield, 77 basis points over the Municipal Market Data’s AAA benchmark and five basis points below the BBB benchmark.

The 10-year in the UBS-won series landed at a yield of 3.62%, 89 bp over the AAA and seven bp more than the BBB.

The 10-year in the state’s last Build Illinois sale for $549 million in August 2016 landed at 1.88%, a 47 bp spread to MMD.

A further S&P hit on the Build Illinois rating may come after S&P publishes revised criteria next week for assigning ratings and related credit products to priority-lien tax revenue debt issued by municipal governments, state governments, or other U.S. public finance obligors where the pledged revenue stream is limited. The S&P criteria change process was disclosed in the offering documents for the bond sale.

The yields landed on par with current trading levels. Build Illinois bonds in the seven to 12 year range have traded recently between 75 basis points to 85 bps over the AAA benchmark.

While the spreads have widened since the 2016 sale, they remain attractive compared to the 180 bp spread trading levels of the state’s 10-year general obligation bond.

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Primary bond market Sales tax State of Illinois Illinois
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