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Why did Illinois yank its bond issue?

Thursday, Jan 31, 2013

* 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.

- Posted by Rich Miller        

17 Comments
  1. - wordslinger - Thursday, Jan 31, 13 @ 11:08 am:

    It’s not a good week to issue muni debt. If you can wait, it’s good to wait.


  2. - Dan Johnson - Thursday, Jan 31, 13 @ 11:16 am:

    There’s got to be a better way to borrow money than depending on just the investment banks to underwrite bonds who then resell the bonds to individuals.

    To quote Johnny Depp in Blow: “We’re getting middled.”


  3. - walkinfool - Thursday, Jan 31, 13 @ 11:26 am:

    ==we were getting indications of higher spreads than we were anticipating==

    Seems pretty simple and clear.

    Word: Is there reason to think it will be better in the next few weeks?


  4. - Ahoy! - Thursday, Jan 31, 13 @ 11:26 am:

    Has anybody done any reporting on how the State is using its bonds? I remember when the Capital bill came out, I believe in 2009 and the State was bonding all the new revues for road overlays, or put in another way, selling 20 year bonds for a 10 - 15 year maintenance activity. I wonder what the 25 year bond was for.

    The State also needs to be smarter on what it’s bonding for, especially with the higher cost of borrowing. Sometimes a pay-as-you-go system works to your benefit when borrowing is more expensive. Not saying all bonding is bad, just I question the ability of the State to make good decisions right now.


  5. - wordslinger - Thursday, Jan 31, 13 @ 11:31 am:

    Walk, don’t know. But yesterday, according to Bloomberg the muni market was showing the highest spreads since Jan. 8.

    If the stock market cools off a little bit, it should be better for the seller.


  6. - Jimbo - Thursday, Jan 31, 13 @ 11:31 am:

    Hey Ahoy,

    Remember ARRA? It wasn’t nicknamed American Rampant Repaving Act for nothing. The feds paid for most of those roads.


  7. - PQ's Primary Opponent - Thursday, Jan 31, 13 @ 11:45 am:

    Don’t those big city New York bankers understand that GOD and PQ are fixing everything?? Gee, I guess they dont see the same dynamic as us here in Illinois!


  8. - 47th Ward - Thursday, Jan 31, 13 @ 12:29 pm:

    ===It’s not a good week to issue muni debt.===

    Looks like I picked the wrong week to stop sniffing glue.


  9. - Dan Vock - Thursday, Jan 31, 13 @ 12:41 pm:

    Meanwhile, California got some good news. S&P upgraded its bond rating today: http://blogs.sacbee.com/capitolalertlatest/2013/01/california-climbs-out-of-sp-ratings-basement.html


  10. - Cook County Commoner - Thursday, Jan 31, 13 @ 12:49 pm:

    S & P today raised California’s bond rating to A based on a projected state surplus. Presumably,the underwriters and others in the know were aware of this before Illinois was to float its debt. If a profligate like California can actually or at least give the appearance of fiscal approvement, this would make Illinois paper look worse. Armed with this knowledge, the underwriters probably asked for extra spread.

    Pulling the bond sale was smart, but I don’t see things getting better.


  11. - UST - Thursday, Jan 31, 13 @ 1:28 pm:

    Bill Gross’ Pimco is starting a new bond fund “Dynamic Credit Income Fund” that will be buying junk status bonds. I suggest that Illinois give him a call.
    Lets face it. Based upon the returns of the Illinois retirement funds, market timing is not one of the state’s better achievements


  12. - Anyone Remember? - Thursday, Jan 31, 13 @ 2:21 pm:

    Cook County Commoner -

    California did two things: (1) the voters approved tax increases in the November 2012 elections, taking them from deficit to surplus; and (2) they “fixed” government pensions, as their Constitution does not say “the benefits of which shall not be diminished or impaired.”


  13. - Formerly Known As... - Thursday, Jan 31, 13 @ 3:18 pm:

    Voters passed the tax increase in California, as opposed to lame duck legislators in Illinois.

    It may not make much difference in one’s pocketbook, but Brown managed to get the public to support his tax increase.

    According to PBS, California also made a series of difficult cuts over the years:
    “With budget cuts coming like clockwork, the state’s vaunted college and university systems declined in offerings and in reputation. Schools suffered cutbacks in personnel and programs. Services for the poor were trimmed by $15 billion since 2008. State workers were furloughed…

    He (Brown) faced a $26 billion deficit and started making more cuts and changes, like transferring inmates from the state’s overcrowded prisons to county jails and closing down local redevelopment agencies, using the money for the state budget…”

    We are slowly beginning to do the same.

    Things may well get worse in Illinois before they get better.

    Ideally the Illinois economy will pick up quickly and help alleviate some of the funding crunch.


  14. - xylem - Thursday, Jan 31, 13 @ 3:52 pm:

    Reuters needs to do better reporting. They talk about the need to fix “bloated public pensions.” This is not pension “bloat.” It is insufficient government funding of reasonable pensions. We need to push back on the rhetoric here. Pensions are NOT bloated. The state government failed to fund the pensions like they were obligated to do.


  15. - Rich Miller - Thursday, Jan 31, 13 @ 4:02 pm:

    ===Reuters needs to do better reporting. ===

    I agree. They wanted to use a poll I commissioned which subscribers got today. No way.


  16. - Responsa - Thursday, Jan 31, 13 @ 4:17 pm:

    Madigan’s love letter was not just a shot actoss the bow to the unions, but was also a calculated message being sent to the bond`raters.


  17. - Shemp - Thursday, Jan 31, 13 @ 11:56 pm:

    Most pension amounts paid annually are anything but bloated. However, the age at which many begin drawing and thus the years of contributions vs the years of withdrawals are not in sync with reality in many cases.


Sorry, comments for this post are now closed.


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