CHICAGO – Illinois achieved about $56 million in present value savings on the refunding portion of its nearly $550 high-grade, sales tax backed deal that sold competitively Thursday.
The sale was offered in four series, with each receiving at least nine bids, state officials said. The deal included about $210 million of new money. Present value savings on the remainder landed at between 14% and 17%.
The bonds carried an S&P Global Rating of AAA and a AA-plus from Fitch Ratings. Moody's Investors Service which aligns the rating to the state's general obligation credit was not asked to rate the bonds. The state's GOs are rated in the triple-B category by all three.
The new money "allows the state to finance projects initiated under the state's capital program" while "the refunding bonds are being issued purely for savings and will not extend debt service payments," state officials said.
"We were pleased with strong interest from the public finance community that enabled the state to borrow at historically low interest rates," said Gov. Bruce Rauner's spokeswoman, Catherine Kelly.
The state paid a yield penalty for its fiscal woes but it was limited and it managed to trim the spreads on a portion of the tax-exempt deal Thursday compared with its last similar sale, even though its GO ratings have sunk and its fiscal picture has grown bleaker as political gridlock delayed passage of fiscal 2016 and 2017 budgets.
The state last sold Build Illinois bonds in a $400 million deal in March 2014 using a taxable structure. The state's last tax-exempt Build Illinois issue sold in June 2013 for $600 million.
In Thursday's sale, the yield on the 10-year maturity in a tax-exempt junior obligation D series for $187 million landed at 1.88% with a 5% coupon. That's 48 basis points over the Municipal Market Data's scale's triple-A yield of 1.40 % at the opening Thursday. The spread is down from 75 basis points in a similar maturity in the tax-exempt 2013 sale.
The spread on the new deal landed 26 basis points over the MMD double-A, and a few basis points under the single-A. Bank of America Merrill Lynch won the series D with a true interest cost of 2.509%.
The 2013 deal captured an overall true interest cost of 2.70%. The 10-year maturity on the 2013 sale carried a yield of 2.94 % with a 5% coupon, a spread over the MMD triple-A of 75 basis points with the opening rate of 2.19%.
The state faced negative headwinds before that 2013 sale. In addition to GO downgrades to the low-single-A category, market conditions were tougher: Municipal yields were rising, underwriters were having difficulties assessing pricing levels, supply was building, and money had been flowing out of the municipal sector.
The market Illinois headed into Thursday was stronger thanks to record to near record interest rate lows, steady inflows, and a strong appetite for yields, which offset the state's weakened fiscal condition.
The new sale had three other series. JPMorgan Securities won the $60 million of junior obligation taxable refunding bonds Series B with a TIC of 2.75%. Yields on the B series ranged from 1.08 % on the short end to 2.62% on the 10 year and 3.17 % in 2034.
The 10 year landed 105 basis points over comparable Treasuries, a wider spread than seen in the state's last taxable Build Illinois deal in March 2014.
The 2014 deal's nine-year maturity landed at 3.49%, 70 basis points over comparable Treasuries. The state's finances had buoyed between the 2013 and 2014 deals with passage of pension reforms – although they were then voided by the state's high court in 2015 – and the state benefitted from improved market conditions.
Limited information was available on the other two series in Thursday's sale. PNC Capital Markets won the $152 million of junior obligation tax-exempt refunding bonds Series C with a TIC of 2.2609%. RBC Capital Markets won the $150 million of junior obligation tax-exempt refunding bonds Series A with a TIC of 2.387%, according to the state.
Ahead of the sales tax issue, Fitch and S&P affirmed their ratings. S&P assigns a negative outlook and Fitch assigns a stable outlook. The program has $1.86 billion of senior lien program debt and another $654.4 million of junior lien paper outstanding. The program enjoys a first claim on the state's 6.25% sales tax, which generated $8.6 billion last year to provide debt service coverage levels of 10 times on the junior lien.
The rating marks a sharp contrast to the state's general obligation rating, which has been battered by a $5 billion budget deficit, a bill backlog that could hit $10 billion this year, and $112 billion of unfunded pension liabilities. Fitch and S&P rate Illinois GOs BBB-plus and have warned of further downgrades as a long-term budget solution continues to elude the state.
Moody's Investors Service doesn't differentiate between the sales tax-backed bonds and Illinois GOs, assigning them its Baa2 rating with a negative outlook.
On the state's most recent GO sale in June, it paid a true interest cost of 3.7425% and saw spreads of about 185 basis points to the MMD top-rated benchmark on its 10-year maturity.
