CHICAGO — Bolstered by a rally in Treasuries that extended to municipals, Illinois captured its lowest true-interest cost Wednesday on a tax-exempt bond sale in more than three decades, even with the stigma of being Moody’s Investors Services’ lowest-rated state.
Ahead of the state’s competitive sale of $275 million of taxable and $525 million of tax-exempt GOs, Moody’s dropped Illinois’ GO rating to A2 from A1 and assigned a stable outlook.
Though an income tax hike enacted early last year helped stabilize state finances in the near term, analysts took lawmakers to task for failing to also rein in ballooning pension funds or address billions in overdue bills.
Fitch Ratings affirmed the state’s A credit and stable outlook, while Standard & Poor’s affirmed its A-plus rating and negative outlook.
The state’s competitive issue drew eight bids on the tax-exempt portion, with Wells Fargo Securities winning the bonds with a TIC of 3.9125%. The cover bid came in two basis points higher.
“It’s the lowest all-in rate the state has seen in recent memory,” said Illinoiscapital markets director John Sinsheimer after reviewing state bond results since 1976. Acacia Financial Group Inc. served as financial advisor and Mayer Brown LLP and Pugh, Jones and Johnson PC were bond counsel. Proceeds will finance projects in the state’s $31 billion capital program. Assured Guaranty Municipal Corp. insured bonds due in 2032, 2035 and 2036.
Last November, Illinois captured a 4.07% TIC on its borrowing, though those bonds were secured by sales taxes and were rated AAA by S&P.
The state’s taxable series drew nine bids with JPMorgan submitting the lowest. The bonds captured a TIC of 5.299%, with the series’ long bond paying a yield of 5.76%, about 277 basis points over comparable Treasuries, Sinsheimer said. The cover bid was eight to nine basis points higher. The long bond on the state’s last taxable GO sale in 2010 under the Build American Bond program carried a yield of about 325 basis points over comparable Treasuries.
Traders said the deal benefited from the drop in Treasury yields with the munis following suit. Scant supply also helped lure buyers who had seen a sizeable amount of their Illinois paper holdings shrink over the last year as maturities came due.
After the enactment last year of the temporary income tax that will raise $6.5 billion this year, the state saw spreads narrow on the steep interest rate penalties demanded by investors due to its budget and liquidity crisis. Some market participants believe the state could see its gains eroded by Moody’s action and S&P’s warning that it could act this year on its negative outlook if lawmakers fail to rein in pension and Medicaid costs and better align spending with recurring revenue.
While a stronger rating and fewer negative headlines might have attracted more investors and driven rates further down on the deal, state officials cast a positive light on the results.
David Vaught, director of the governor’s Office of Management and Budget, said: “These bond bids make clear that investors know we are taking steps to correct the decades of fiscal mismanagement in our state, and they understand we continue to take major steps to reform pensions and control skyrocketing Medicaid costs in an effort to return Illinois to sound financial footing.”
Gov. Pat Quinn this week vowed to tackle pension woes. “Our rendezvous with pension reality will come this year,” he said about the downgrade.
Reforms that would have lowered future benefits for current employees stalled last year. The state closed out fiscal 2011 with $82.9 billion of unfunded liabilities for a funded ratio of just 43.4%. Pension payments will rise in fiscal 2013 to $5.8 billion from $4.9 billion this year. Illinois is also expected to close out fiscal 2012 owing billions in bills.
Sinsheimer said he’s not concerned that the low rate captured on the deal will take pressure off lawmakers to act. “The pressure remains to come up with solutions,” he said.
