CHICAGO – Illinois paid higher yield penalties than it did before its budget fell into gridlock when it priced a $480 million general obligation issue Thursday.
Still, market participants said the nation's lowest-rated state reaped the benefits of a favorable market flush with investment cash to pare down recent secondary market trading spreads.
Bank of America Merrill Lynch submitted the winning bid among nine on the competitive sale to capture a true interest cost of 3.99%. Goldman Sachs submitted the cover bid of 4.044 %, according to sources.
It was Illinois first primary market deal in 20 months.
Illinois fared better in its spreads over Municipal Market Data's top-rated benchmark than it has in recent secondary trading. But it paid a steep penalty in a widening of spreads compared to its spring 2014 sales, after more than a year and a half of fiscal woes, credit deterioration, and political dysfunction.
The state is more than six months into fiscal 2016 without a budget as Republican Gov. Bruce Rauner, who marked his first anniversary in office this week, and the General Assembly's Democratic majorities remain at loggerheads over governance, policy, and spending issues.
Illinois' 10-year maturity paid a yield of 3.33%, 155 basis points over the top-rated MMD benchmark and 61 basis points over the triple-B benchmark. The deal's long 25-year bond paid a yield of 4.27%, 161 basis points over the top rating benchmark and 73 basis points over the triple-B. The spreads are lower than the 170 to 180 basis points Illinois GO paper has traded at recently.
But the state priced at spreads between 95 to 110 basis points on deals in 2014 before the Illinois Supreme Court overturned state pension reforms and the budget impasse took hold.
Fitch Ratings and Moody's Investors Service recently lowered their ratings on Illinois by one notch to BBB-plus and Baa1, respectively, with Fitch assigning a stable outlook and Moody's a negative one. Standard & Poor's assigns its A-minus rating, with a negative outlook.
The Rauner administration acknowledged the widening of spreads but sought to highlight the low rate compared to the state's 2014 sales even though the current TIC reflects prevailing rates that are now lower.
"This is a better rate than the last four tax-exempt GO bond sales," said Rauner spokeswoman Catherine Kelly, citing the last deal's 4.08% TIC.
"We recognize that rates have declined since the last time Illinois issued general obligation bonds, but we were pleased to price lower than the state's recent trades in the secondary market," she said.
While the administration sought to portray the deal's results as a display of market confidence in "the governor's leadership," market participants said they attribute it more to confidence in the state's overall economic viability and strength of the GO structure that gives priority to debt service.
Other key factors include the market's abundance of investment dollars, a flight to municipals, and possibly, the top bidder's desire to strut its name and gain favor with the Rauner team.
Given the market's improvement, "all issuers are going to benefit," said Jim Colby, chief municipal strategist at Van Eck Global. "It's a headline disaster that Illinois can't seem to come to an agreement on their fiscal problems but they have the embedded capacity and ability to do that if they can just come up with the political will."
Market participants described BAML's bid as an aggressive one given the variance from secondary trading levels, but Colby said there's a certain amount of "prestige" for the Street's top municipal underwriter in 2015 to come on strong in a prominent deal, making a statement in defense of "its status." It also potentially sends the state a message that it stepped up and is available if other opportunities arise.
Maturities in 2034 and from 2037 to 2039 were insured by Assured Guaranty Municipal.
Proceeds of the sale will finance ongoing infrastructure and transportation projects in a $31 billion capital program that is winding down. The 2016 capital budget calls for $1.1 billion in borrowing but it's unclear how much the state will tap.
The state is now headed into its fiscal 2017 budget season without a budget for the current year in place and no signs that the impasse is abating. Rauner will deliver his State of the State address on Jan. 27 and a fiscal 2017 budget next month. The Senate convened this week but is now out until Rauner's address, when the House will also return.
The state continues to make payroll, pay debt service, and cover some other bills through continuing appropriations, special appropriations legislation passed by lawmakers and signed by Rauner, and court orders and consent decrees, but it's $5 billion short of what's needed to cover bills this year. That's driven its unpaid bill backlog is up to $7 billion when overdue vouchers and bills being held by state agencies are counted.
