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Getting a little better

Thursday, Feb 6, 2014

* Bloomberg

Illinois paid a 26 percent smaller yield penalty to issue $1 billion of general-obligation bonds, a sign investors are rewarding lawmakers for passing a bill to mend the worst-funded state pension system.

The sale included debt maturing in February 2024 that was priced to yield 3.81 percent, down from an initial 3.87 percent, according to data compiled by Bloomberg. The interest rate is 1.13 percentage points above benchmark 10-year municipal bonds.

* From the governor’s budget office…

The state received $5.5 billion in orders for the $1 billion offer from 109 individual investors, including six life insurance companies which are highly selective investors. The average interest cost (TIC) was 4.46%, compared to an average interest cost (TIC) of 5.05% the state achieved for a $1.3 billion bond offer in June, prior to the passage of the pension reform legislation.

The average interest cost on Thursday’s sale ran about 50 basis points – or half a percent — better than the spread from the 10-year MMD June sale.

The sale was so over-subscribed that the final amount of bonds sold was actually $1,025,000,000.

“We are gratified by the support investors have shown in the state and in the steps we have taken to stabilize Illinois’ finances, most notably the passage of the comprehensive pension reform plan,” said Illinois Director of Capital Markets John Sinsheimer.

- Posted by Rich Miller        

  1. - wordslinger - Thursday, Feb 6, 14 @ 2:59 pm:

    50 basis points from the last sale is a lot.

  2. - archimedes - Thursday, Feb 6, 14 @ 3:07 pm:

    The difference from benchmark is the important number. If the release is apples to apples to the last sale, it is saying 26% less yield penalty compared to the benchmark. So if the penalty is now 1.13%, it compares to 1.31% - or about 28 basis points.

    The remainder of the 50 basis points would be market driven.

    Lost of things go into this - but certainly the pension reform (which resulted in a Moody’s positive) is significant. But maybe more realistically it is worth 1/4%, not 1/2% on the yield.

  3. - Formerly Known As... - Thursday, Feb 6, 14 @ 3:23 pm:

    Good news, but to keep things in perspective we should remember Illinois still pays significantly more than other states. 2 or 3 times more than any other state, if IIRC.

    One step forward, with many more miles to walk.

  4. - Anonymous - Thursday, Feb 6, 14 @ 3:24 pm:


  5. - Bill White - Thursday, Feb 6, 14 @ 3:45 pm:

    === 2 or 3 times more than any other state, if IIRC. ===

    Huh? A quote from the post . . .

    === The sale included debt maturing in February 2024 that was priced to yield 3.81 percent, down from an initial 3.87 percent, according to data compiled by Bloomberg. The interest rate is 1.13 percentage points above benchmark 10-year municipal bonds. ===

    3.81 minus 1.13 = 2.68

    3.81 / 2.68 = 1.42

    42% more ain’t good but it’s not 2 to 3 times more than the benchmark

  6. - Bill White - Thursday, Feb 6, 14 @ 3:47 pm:

    Paying 1.13 percentage points more is not good but it is very far away from “death spiral” territory.

  7. - walker - Thursday, Feb 6, 14 @ 4:19 pm:

    Bill White said it all.

    Progress slow, but sure.

  8. - Anon - Thursday, Feb 6, 14 @ 5:52 pm:

    Wby aren’t Republicans cheering at the progress? Oh, that’s right, it’s an election year.

  9. - Anonymous - Thursday, Feb 6, 14 @ 6:49 pm:

    @Bill White & @walker - you misunderstand me, or maybe I was not clear.

    As I said, Illinois === pays 2 or 3 times more than any other #state. === That is NOT the same as 2 or 3 times more than the benchmark.

    When you are in a bad financial situation, you have to pay more to borrow money.

    Our “credit spread”, or the “penalty rate”, is the amount we pay above the benchmark rate.

    Other states aren’t even close to us. In general, Illinois pays 5-10 times more than most other states do to borrow money.

    We even pay 3 times more than California, which is the next-closest state to us IIRC.

    Again, === One step forward, with many more miles to walk. ===

  10. - Formerly Known As... - Thursday, Feb 6, 14 @ 6:54 pm:

    Sorry, @Anonymous @6:49 was me.

    And to the post: It even says it right there in the article Rich linked to

    === Illinois also pays the highest borrowing costs among 17 states tracked by Bloomberg. Its yield spread is almost triple that of California, rated one level higher by S&P. ===

    So yes, we pay 2-3 times more than any other state.

    Today was progress. There is simply much more work to be done before we break out the champagne and get comfortable.

  11. - Bill White - Thursday, Feb 6, 14 @ 7:11 pm:

    === For example, if a risk-free 10-year Treasury note is currently yielding 5% while junk bonds with the same duration are averaging 7%, the spread between Treasuries and junk bonds is 2%. ===

    If the benchmark is 5% and CA pays 6% and IL pays 7% the IL yield spread would be 2, double the yield spread of CA.

    $100 at 5% = $5
    $100 at 6% = $6
    $100 at 7% = $7

    In this hypothetical the IL yield spread is double the CA yield spread however IL taxpayers would only pay 7/6ths as much interest as CA taxpayers, not 2 to 3 times as much.


    The difference between IL rates and the benchmark is $10 million per year per billion dollars borrowed. Bad? Sure.

    But a “death spiral” ??

    Not even close.

  12. - Howard - Thursday, Feb 6, 14 @ 7:57 pm:

    And so when SB1 gets tossed and it will, then what?

  13. - Formerly Known As... - Thursday, Feb 6, 14 @ 10:12 pm:

    I will say this, @Bill White - you sure do know how to make a person feel better about coming in last, lol.

    Have a good night.

  14. - Robert the Bruce - Friday, Feb 7, 14 @ 8:01 am:

    ==And so when SB1 gets tossed and it will, then what?==
    Duh. Assuming that happens, we’ll pay higher interest rates.

    We really should be borrowing as much as we can in this window of opportunity.

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