* 12:58 pm - The governor’s budget office claims via press release that, despite the recent Moody’s downgrade, interest on the state’s bond sales are actually lower than recent issues…
The Governor’s Office of Management and Budget today is pleased to announce the State successfully has sold $525 million of tax exempt General Obligation Bonds and $275 million of taxable General Obligation Bonds. The bond sale provides funding for the Illinois Jobs Now! Capital plan, which was signed into law by Governor Quinn to help revive the state’s ailing economy by creating and retaining more than 439,000 jobs over six years.
“Positive feedback like we have seen today from investors demonstrates the strong confidence investors have in Illinois,” said David Vaught, Director of the Governor’s Office of Management and Budget. “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.”
In a competitive sale, the $525 million tax exempt issuance priced with an interest rate of 3.9125 percent with Wells Fargo as the successful bidder. This is the lowest rate the State has received on a tax-exempt capital bond issuance in recent history. As a note of comparison, in November of 2011, the states triple A rated Build Illinois Bonds priced with an interest rate of 4.07 percent. The state received 8 bids overall.
The $275 million taxable issuance priced with an interest rate of 5.2992 percent with J.P. Morgan Securities LLC as the successful bidder. The state received 9 bids overall for this issuance. As a basis of comparison, the 2037 maturity has a 5.76 yield which is 277 basis points higher than a comparable U.S. Treasury rate. The most recent General Obligation capital bond issuance in July of 2010 priced similar bonds with a spread of 325 basis points above the comparable U.S. Treasury rate. This equates to a 48 basis point improvement. [Emphasis added]
Discuss.
…Adding… Treasurer Dan Rutherford’s prediction via press release last week apparently didn’t hold up…
“The downgrade will result in Illinois taxpayers paying an estimated additional $60 million to repay the issuance of next week’s scheduled $800 bond sale. In addition, this may impact Illinois institutional bond holders which may have to sell their current Illinois bond holdings because their investment policies require minimum bond ratings greater than our new rating.”
…Adding More… You also have to wonder if Bloomberg and the Tribune editorial board will run corrections…
The sorry result: when it sells these bonds, Illinois may face borrowing costs more than four times as high as the average it has paid over the last 10 years, according to Bloomberg.
Don’t bet on it.
*** UPDATE 1 *** The budget office says they looked at the history of Illinois’ long-term tax exempt capital bonds all the way back to 1984 (the earliest records they have) and didn’t find any at a lower rate than the 3.9 percent from today’s $525 million tax exempt issuance.
Wow.
Of course, interest rates are at historic lows, so that’s obviously helping here. And the rate would’ve been even lower if we were a AAA state. But the hand-wringing about this particular issuance appears to have been way, way off the mark. Let’s see if anybody admits it.
*** UPDATE 2 *** From Treasurer Rutherford…
“Illinois sold $800 million worth of bonds today for important projects such as new roads and schools. I am indeed pleased that we will pay a lower interest rate on these bonds than we did last year, but it’s important to keep these ‘savings’ in perspective.”
“Market conditions – such as the European crisis causing a flight to American quality – were favorable today, but the rates we received would have been considerably better without Moody’s lowering of Illinois’ credit last week. Tens of millions of extra dollars were still taken out of taxpayers’ pockets today because of the financial condition of Illinois as determined by Moody’s.”
“Moody’s downgrade reinforces my stance: Illinois needs to solve its unfunded public pension crisis and pay all outstanding bills without borrowing additional money.”
*** UPDATE 3 *** The budget office says they’ve found records dating back to 1976, and they still haven’t found a lower interest rate on a similar bond offering.
*** UPDATE 4 *** Bloomberg compares Illinois’ offering to other “top rated debt” and has a negative conclusion…
Illinois’s cost to borrow relative to top-rated issuers tripled from 2009 when it sold $800 million of bonds today, after its credit rating was cut by Moody’s Investors Service to the lowest among U.S. states.
The $525 million tax-exempt part of today’s sale included 10-year general-obligation bonds priced to yield 3.1 percent, according to data compiled by Bloomberg. That’s 110 basis points more than the 2 percent yield of top-rated 10-year debt.
A 10-year bond sold on Sept. 16, 2009, the last time Illinois took competitive bids for tax-exempt general obligations, was priced at 37 basis points above top-rated debt. A basis point is 0.01 percentage point.
*** UPDATE 5 *** Wall Street Journal…
Both Wells and J.P. Morgan reoffered bonds to investors at lower yields than where outstanding Illinois debt currently trades, reflecting how strong the sale was, market participants said.
Wells offered 10-year tax-exempt debt for Illinois with a coupon of 4% and a yield of 3.10%, for instance. That’s around 0.20 percentage point less in yield than where comparable outstanding Illinois debt traded late last year, said Michael Pietronico, chief executive officer of Miller Tabak Asset Management in New York. It’s also around 1.30 percentage point more in yield than what triple-A munis offer on Thomson Reuters Municipal Market Data’s benchmark scale.
“The flavor of the muni market so far in 2012 has been investors reaching for [higher-yielding] product to generate excess total return and income,” said Pietronico, whose firm manages about $625 million in muni assets. He said his firm would buy Illinois debt in the secondary trading market if it came at juicier yields than those offered in the deal Wednesday.
A relative dearth of new bonds in the muni market helped reception of Illinois’ sale, too, said portfolio managers. States, cities and other so-called municipalities have sold $1.6 billion of municipal debt so far this year, according to data provider Thomson Reuters. That’s less than one-third of the volume of a typical week in 2011.
- John Bambenek - Wednesday, Jan 11, 12 @ 1:05 pm:
I’m not sure the bids on bonds have much to do with the ratings anymore as institutional investors already build in the state’s problems into their calculations. If I played with a few billion every day, I wouldn’t need Moody’s to tell me what’s wrong with Illinois.
Then again, it may come back to the old adage “You don’t have to be the best, you just have to be the least crappy option.”
- Retired Non-Union Guy - Wednesday, Jan 11, 12 @ 1:06 pm:
Bottom line: Illinois has always paid the bondholders … and they know it.
- Small Town Liberal - Wednesday, Jan 11, 12 @ 1:12 pm:
- I’m not sure the bids on bonds have much to do with the ratings anymore as institutional investors already build in the state’s problems into their calculations. -
Perhaps you should enlighten Mr. Brodsky. Not sure what you mean about being the least crappy option. These folks obviously think Illinois is a pretty sure bet on paying them back, in this type of market who are the worse options?
- Nagidam - Wednesday, Jan 11, 12 @ 1:16 pm:
How much would a state without the problems in Illinois pay? As a homeowner I could get a mortgage and pay a rate one day and then the rates go down and I pay less. That doesn’t mean my credit score got any better. So, how does the price compare with other states with better ratings.
- Peter - Wednesday, Jan 11, 12 @ 1:17 pm:
Well let’s just hope none of the state pension funds are deep into Illinois bonds….
- Kerfuffle - Wednesday, Jan 11, 12 @ 1:19 pm:
Let’s face it, today’s low interest rates have as much to do with the state’s good fortune as anything.
- Jimbo - Wednesday, Jan 11, 12 @ 1:21 pm:
Rutherford was worried about the effects on an “$800 bond sale”? He’s gonna be ticked when he finds out we sold a million times that /snark
- reformer - Wednesday, Jan 11, 12 @ 1:28 pm:
This is good news. For some reason, I doubt that Dan and Mother Trib will celebrate it.
- wordslinger - Wednesday, Jan 11, 12 @ 1:28 pm:
Gee, I guess nobody took any of those phone calls that the state treasurer said he was going to make dumping all over Illinois paper. Never knew that was in his job description.
What’s wrong, JB, can’t stand a little good news? The state just got a lower rate than their last AAA rated bonds.
It’s not a “least crappy option” as you so eloquently put it. No one is making ANYONE buy Illinois bonds — there’s plenty of other paper out there. The rate is low because demand for the paper is strong.
- CircularFiringSquad - Wednesday, Jan 11, 12 @ 1:32 pm:
So where can we start?
Bankrupt Tribbies advice is worth: zero/still
DandyDan should get his office combined: NOPE
Moody’s Rating is worth: Squat
RomneyZombies Chances in November: Zip, Zero, Nada
Fire, Aim, Ready!
- King Louis XVI - Wednesday, Jan 11, 12 @ 1:34 pm:
Rutherford is all about bad-mouthing Illinois to financial markets and to anyone, really, who will listen.
His sole aim is get his mug in front of TV cameras to gain traction for his campaign for governor. He cares not one squid if he helps screw Illinois in the process.
- Kasich Walker, Jr. - Wednesday, Jan 11, 12 @ 1:36 pm:
Still don’t see why it was necessary to pay out over 5% in today’s market.
- wordslinger - Wednesday, Jan 11, 12 @ 1:42 pm:
–His sole aim is get his mug in front of TV cameras to gain traction for his campaign for governor. He cares not one squid if he helps screw Illinois in the process.–
I don’t know if that trash-talking helps with many voters. It does get the attention of the Civic Committee and presumably brings in some campaign checks.
- wordslinger - Wednesday, Jan 11, 12 @ 1:43 pm:
KW, the bonds over 5% are taxable.
- bondlover - Wednesday, Jan 11, 12 @ 1:46 pm:
dang wells fargo must of worked hard to price those
- wordslinger - Wednesday, Jan 11, 12 @ 1:47 pm:
–The budget office says they looked back at the history of long-term tax exempt capital bonds all the way back to 1984 (the earliest records they have)–
Um, say what? Did Dr. Bob loot the office on his way out the door? That strikes me as an area where you might want to keep permanent records.
- John Bambenek - Wednesday, Jan 11, 12 @ 1:49 pm:
STL et al-
As far as “least crappy option”, look at the dollar’s decent performance over the past few months. People are looking for a safe harbor for their investments which is a relative determination. The EU financial union, barring something extraordinary, is breaking apart. And even though the US now has a 100% GDP-debt ratio, we aren’t at a high risk of default and the nation isn’t at risk to spiral into 50 separate countries (or 51 if that secession resolution passes
.
Sure, no one puts a gun to investors heads, but they need to put money somewhere because a few billion is hard to hide under a mattress.
I’m not saying it isn’t good news, sure, I like bonds at as cheap as rates as possible. I just don’t take the low bond interest rates to mean we should jump up and down and pretend we don’t have real budgetary problems.
- Anonymous - Wednesday, Jan 11, 12 @ 1:53 pm:
Of course, interest rates are at historic lows, so that’s obviously helping here. And the rate would’ve been even lower if we were a AAA state.
That is the story here. All the rest is just political window dressing on both sides.
- Dirty Red - Wednesday, Jan 11, 12 @ 1:58 pm:
This is still an unfair statement from OMB. Moody’s rating was not the reason interest rates were lower. The same rating won’t make it easy for them to sell the UI bonds this summer for less than 4% unless the economy remains the way it is.
- Kasich Walker, Jr. - Wednesday, Jan 11, 12 @ 2:03 pm:
Slinger, I’m not up on taxable rates of recent state issuances, but I do know that anyone trying to get above 2% at any of a dozen local banks for the paltry savings is out of luck.
If there was any will to raise $275 million from 1 million midwesterners wanting only 3% or less quickly, a way would have been found.
Chase….and Sears & CBOE….nuff said.
- Small Town Liberal - Wednesday, Jan 11, 12 @ 2:06 pm:
- I just don’t take the low bond interest rates to mean we should jump up and down and pretend we don’t have real budgetary problems. -
Neither do I, but it seems to me the chicken littles of Illinois such as Rutherford and Kirk seem to do a lot of jumping up and down and pretending whenever a rating agency decides to downgrade us. What exactly is the point of those ratings anyway?
- Rich Miller - Wednesday, Jan 11, 12 @ 2:07 pm:
===I just don’t take the low bond interest rates to mean we should jump up and down and pretend we don’t have real budgetary problems.===
And who is doing that? How about we also don’t pretend that it’s worse than it is?
- TwoFeetThick - Wednesday, Jan 11, 12 @ 2:14 pm:
And somewhere in an alternate universe, tomorrow’s headline:
TRIBUNE ADMITS IT WAS WRONG
Rutherford: “It’s all my fault”
- wordslinger - Wednesday, Jan 11, 12 @ 2:15 pm:
–People are looking for a safe harbor for their investments which is a relative determination.–
And the market has determined that Illinois debt is safe harbor. That’s what happens when you don’t miss a payment for nearly 200 years.
So maybe statewide elected officials, The World’s Greatest Bankrupt Newspaper, JJ, Brodsky, the Handout Kings of the Civic Committee can stifle themselves for a couple of days on their endless Armageddon yammering.
- Old Milwaukee - Wednesday, Jan 11, 12 @ 2:17 pm:
Great news. We must be doing something right. Keep on keepin on, Governor.
- Ahoy - Wednesday, Jan 11, 12 @ 2:20 pm:
Maybe it’s so low because Rutherford didn’t call up the bond houses and ask them to raise interest rates on Illinois taxpayers…
- Michelle Flaherty - Wednesday, Jan 11, 12 @ 2:21 pm:
Quinn’s staff can’t find any records before 1984 because most of them are unaware the world existed before 1984.
- capncrunch - Wednesday, Jan 11, 12 @ 2:31 pm:
Doesn’t the narrowing of the spread over the last two years indicate that the market thinks Illinois fiscal situation has improved verses that of the US or, more likey, the US fiscal situation has deteriorated more than that of Illinois? RM:”…the rate would’ve have been even lower if we were a AAA state.” Therefore, shouldn’t the objective comparison be against other states.
- John Bambenek - Wednesday, Jan 11, 12 @ 2:31 pm:
STL, Wordslinger and Rich Miller-
It isn’t like I ghost wrote any of the press releases you are referring to, you know.
- PJ - Wednesday, Jan 11, 12 @ 2:34 pm:
Wow. The Treasurer tried his hardest to paint Illinois as the worst state ever saying the upcoming bond would be at the highest rates the state has ever paid. Will he admit he was wrong?
- Small Town Liberal - Wednesday, Jan 11, 12 @ 2:37 pm:
- It isn’t like I ghost wrote any of the press releases you are referring to, you know.
-
Maybe not, but I’ve seen some “sky is falling” from you, like Bank of America cancelling Illinois credit cards.
- MrJM - Wednesday, Jan 11, 12 @ 2:53 pm:
But it’s so embarrassing to admit that the problem isn’t as terrifying they said it would be when they’ve already peed their pants.
– MrJM
- Kasich Walker, Jr. - Wednesday, Jan 11, 12 @ 2:56 pm:
I’m convinced Amazon.com or paypal could handle a broader based issuance of debt for the State in smaller increments more efficiently than either Chase or Wells Fargo does at its increments of 5 grand or more; and they’d get plenty of cash for the State at less than 3.5%.
I hope to see it happen within a decade or less.
- TCB - Wednesday, Jan 11, 12 @ 2:56 pm:
Do I get any sort of prize for correctly predicting this outcome this morning in the other post’s comments?
- TCB - Wednesday, Jan 11, 12 @ 3:06 pm:
I’d imagine that 1984 is the cut-off for when Vaught has electronic records.
1984 was a different age, people. The state doesn’t have the resources or the staff to convert paper records to electronic. Since all bonds issues before 1984 have matured, there is no need for these records…..right?
I’d imagine that when Vaught says, “they looked back at the history of long-term tax exempt capital bonds all the way back to 1984″ that he only looked back at the most readily available records, which would be electronic.
- RMWStanford - Wednesday, Jan 11, 12 @ 3:08 pm:
If Illinois still had a higher bond rating how much lower would the interest rate be? What kind of savings would that be equal too? How much damage the downgrade has caused was played up for political reasons of course but that being said there is no reason to be proud that the state has gotten low interest in period when rates are at or near the lowest they are likely to be for a long time.
- Dooley Dudright - Wednesday, Jan 11, 12 @ 3:10 pm:
Okay, so — remind me.
Why is it that we can’t float new paper (at low rates) to pay down old bills (at high rates)?
Extortionate interest? Not!
A pox on all new borrowing, no matter what the parameters? Hey, we already owe the money; it’d effectively be a refi.
Another ding on the state’s credit rating? Didn’t seem to matter today!
It’d remove the impetus to arrest/cut spending, and we’d just kite out the bills again? I’m not convinced.
- TCB - Wednesday, Jan 11, 12 @ 3:10 pm:
Kasich,
You are aware this is long-term debt, right? 25 years to be exact.
- reformer - Wednesday, Jan 11, 12 @ 3:16 pm:
PJ
Don’t hold your breath waiting for Treasurer Chicken Little to admit he was wrong.
- Kasich Walker, Jr. - Wednesday, Jan 11, 12 @ 3:17 pm:
TCB
No, I wasn’t aware of the term, but I assumed it was at least a decade.
A buyer of a smaller increment via an Amazon.com issuance or e-bay issuance could no doubt sell it the same way when they wanted the principal.
- Rod - Wednesday, Jan 11, 12 @ 3:27 pm:
The likeliness of a default by Illinois is relatively low in the near term, but it is higher than in the past. One reason the interest rate was as reported as low as it was may be because of bond insurance.
If one compares the pricing of new bond issues that are insured to similar issues that are not insured. The results normally indicate that issuers who purchase bond insurance, on average, are able to reduce their new issue borrowing cost more than enough to offset the cost of the insurance premium. Furthermore, the net benefit to the issuer normally increases as the underlying credit quality of the bond declines.
But in this situation we have no information what Illinois paid for bond insurance in relation to the debt being issued, or if these bonds were secured. If you read the press release carefully it does not discuss this issue at all, this drives what is called the “true interest rate”. When Illinois issued Build Illinois Bonds back in 2007 the state did not insure its bonds at all and one had to purchase bond insurance that was listed on the official bid form. This effectively lowered the true interest rate for those who bought the bonds or they took the risk on themselves.
If Illinois was able to issue these bonds in unsecured form at the interest rate stated in the press release that would be an accomplishment and Rich’s “Wow” is appropriately stated.
- Anyone Remember - Wednesday, Jan 11, 12 @ 3:28 pm:
wordslinger -
In addition to TCB’s comments about paper records, there’s more. In 1984 most bonds were consolidated and a new bonding scheme was put in place by Public Act 83-1490. From IOC’s FY 2010 Bonded Indebtedness report:
” Public Act 83-1490 reduced the bond authorizations of all previous bond acts, with the exception of the University Building and Public Welfare Bond Acts, to an amount equal to the amount of bonds issued and created the General Obligation Bond Act. The General Obligation Bond Act consolidated all the previous individual bond purposes and provides for the issuance of multi-purpose bonds (see Exhibit II). As of June 30, 2010 the General Obligation Bond multiple purposes
were designated as follows:”
Page B-2
http://www.ioc.state.il.us/?LinkServID=51E3FD7F-1CC1-DE6E-2F48F3F5A895A821&showmeta=0
And, remember, prior to the Constitution of 1970, the State of Illinois could not issue any bonds … state buildings were built by the Illinois Building Commission (Authority?) which then leased them to the State.
Quite possibly Dr. Bob got rid of the papers in 1984 when PA 83-1490 consolidated all the previous bonds? He was there until 1989 or so.
- Rusty - Wednesday, Jan 11, 12 @ 3:33 pm:
I don’t think Bloomberg bought into Vaught’s talking points.
Illinois Bond Spread Triples After Moody’s Reduces State to Lowest-Rated
http://www.bloomberg.com/news/2012-01-11/illinois-sells-800-million-of-debt-competitively-to-wells-fargo-jpmorgan.html
- wordslinger - Wednesday, Jan 11, 12 @ 3:37 pm:
Thanks, AR, good stuff.
Rod, I’ve been out of the business for a while, but I can’t recall a state ever purchasing insurance for a GO bond.
Back in the day, bond insurance would get you a AAA rating. But the bond insurance biz isnt’t what it used to be — some of those guys got whacked in September 2008, too.
- wordslinger - Wednesday, Jan 11, 12 @ 3:41 pm:
–The budget office says they’ve found records dating back to 1976, and they still haven’t found a lower interest rate on a similar bond offering.–
If they find any shoe boxes labeled “Paul Powell,” those are mine.
- TCB - Wednesday, Jan 11, 12 @ 3:58 pm:
=Rod, I’ve been out of the business for a while, but I can’t recall a state ever purchasing insurance for a GO bond.=
I don’t believe that the state has ever purchases bond insurance directly, however, the investors are more than welcome to purchase it on their own…….and recently they have. I am confident that this sale has a handful of maturities in which insurance was purchased.
Obviously when the underwriters/investors purchase insurance, they build the cost of that insurance into the rate they bid. So the state indirectly paying to insure its own paper. Regardless of who purchases the insurance, it’s cost is included in the True Interest Cost calculation. It is certainly possible that bond insurance contributed to the low rate. However, given that the last couple GO sales have also been insured, it is more than fair to compare them.
It seems to me that Moody’s downgrade had little to no effect on today’s bond sale, which we as tax payers should be very happy about.
- PJ - Wednesday, Jan 11, 12 @ 4:18 pm:
The Treasurer was “indeed pleased” with the low interest rate. Yeah right, he wishes ill on Illinois.
- King Louis XVI - Wednesday, Jan 11, 12 @ 4:21 pm:
That’s it Danny Boy. One more kick in the state’s shins. Nice.
- Jaded - Wednesday, Jan 11, 12 @ 5:01 pm:
I think the point is that they got a great rate because of the market, but it wasn’t as great of a rate as it could have been because of the fiscal condition of the state. Also, as much as I would like to blame him for everything, you can’t hang the fiscal condition of the state just on Pat Quinn. He is an awful Governor, but this problem was created years before he took over (and I use that term loosely).
Let’s face it, money is cheap write now. Someone with an 800 credit score can refi their home for 15 years for under 3% right now. That is unheard of. Someone with a 650 credit score could still probably get between 3 and 3.5, again unheard of.
Maybe Rutherford should tone down the political rhetoric and tend to his own knitting, and maybe GOMB should tell that poor analyist to come out of the basement and quit looking through all those smelly banker boxes.
- Ahoy! - Wednesday, Jan 11, 12 @ 7:11 pm:
-“Moody’s downgrade reinforces my stance: Illinois needs to solve its unfunded public pension crisis and pay all outstanding bills without borrowing additional money.”–
Again, not new borrowing, Illinois is already borrowing there danny.
- Yellow Dog Democrat - Wednesday, Jan 11, 12 @ 7:35 pm:
That 3.1 yield is indeed 110 basis point higher than our previous issue.
Its also 900 basis points lower than the interest we’re paying non-profits and other service providers for our backlog of unpaid bills.
- mark walker - Wednesday, Jan 11, 12 @ 9:59 pm:
Wow. I never thought I’d see political commentators so focused on bond market rates.
It’s not the disaster the Tribune, or Danny said it would be, but not quite as good as it could have been. Rates are especially favorable now mostly due to factors out of our control.
One more reason that the time to restructure accounts payable debt to lower our costs, is now. Every month we don’t move on this, is a politically-driven disgrace.
- mushroom in the dark - Wednesday, Jan 11, 12 @ 10:06 pm:
“Of course, interest rates are at historic lows, so that’s obviously helping here. ”
10 year treasuries sold at record lows yesterday also, 1.9 percent.
3.9 percent tax free versus 1.9 percent taxable yields and both unlikely to default.
Not hard to see why the yields are at record lows on Illinois munis.
http://www.sfgate.com/cgi-bin/article.cgi?f=/g/a/2012/01/11/bloomberg_articlesLXNN526K50XU.DTL