* Reuters looks into why Illinois withdrew its bond issue this week…
Illinois yanked a $500 million general obligation bond issue slated for Wednesday because of credit concerns that could boost its borrowing costs, in the latest financial blow to the state, which has failed to fix its bloated public pensions.
Investment banks that planned to bid on the debt indicated investors would demand higher yields on the 25-year bonds, said John Sinsheimer, Illinois’ capital markets director.
“We were getting indications of higher spreads than we were anticipating,” said Sinsheimer, who declined to discuss specific spread levels. “We felt it was prudent to pull the deal for the time being.”
Illinois is already faced with the highest spreads - 137 basis points in the latest week - over Municipal Market Data’s benchmark triple-A scale among states and cities tracked by MMD, a unit of Thomson Reuters. By contrast, the spread for California, another low-rated, high-debt issuance state, was only 48 basis points in the week ended Jan. 25. […]
Tim McGregor, director of municipal fixed income at Northern Trust, said the state probably would have had little difficulty selling the bonds on Wednesday “with a little bit of yield” given low supplies of debt in the $3.7 trillion municipal market and yield-hungry investors. He added that if Illinois wants to attract lower rates in the market, it needs to fix its finances, particularly pensions.
“Spreads won’t tighten just because they want them to tighten,” he said, adding the state needs to impress the market by tackling pension reforms.
Either way, it was probably prudent to let the furor over the rating reduction die down for a while.