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State bond sale goes well, but still paid a higher price

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Illinois’s next big bond deal sounds like a municipal-market oxymoron: the worst-rated state in the nation is offering more than half a billion dollars of AAA debt.

The $573 million of securities the state plans to sell Thursday are secured by a stream of sales-tax revenue that’s diverted to investors, earning the deal the highest ranking from S&P Global Ratings. That’s seven steps above the state’s general-obligation debt, which is backed only by the government’s guaranty to pay what it owes.

“We expect the state of Illinois’s sales-tax bonds to fare better than the state of Illinois’s GO bonds, primarily due to the substantial support from the designated sales tax,” said Richard Ciccarone, the Chicago-based president of Merritt Research Services LLC, which analyzes municipal finances. “However, they will suffer. It will extract a higher borrowing penalty than would normally be expected for such a high-rated bond issue because of the chronic financial pressures.”

The sale went better than expected, but the cost was still higher than other states with AAA ratings.

* Today…

Illinois sold nearly $549 million of revenue bonds in competitive bidding on Thursday, dodging a steep market penalty the financially struggling state has paid for its general obligation bonds.

The Build Illinois bonds, backed by the state’s sale tax revenue, have high-quality credit ratings of AAA from Standard & Poor’s and AA-plus from Fitch Ratings versus Illinois’ low-investment-grade GO ratings, which are the weakest among the 50 states.

Illinois has a huge $111 billion unfunded pension liability and a chronic budget deficit. It was the only state without a complete fiscal 2016 budget due to a political impasse.

Bank of America Merrill Lynch won the biggest chunk of the bond issue - nearly $187 million of tax-exempt refunding bonds.

The pricing resulted in a spread over Municipal Market Data’s benchmark triple-A yield scale for 10-year bonds of 48 basis points, about 20 basis points narrower than the state’s last tax-exempt Build Illinois bond sale in June 2013.

The spread was also almost 3.5 times narrower than Illinois’ 166 basis-point spread over the scale for 10-year GO bonds.

…Adding… From the governor’s office…

Hi there –
Wanted to send you this statement for bond sale post.

STATEMENT: We were pleased with strong interest from the public finance community that enabled the State to borrow at historically low interest rates – and by cutting interest rates in half on some of our outstanding Build Illinois bonds, we will provide taxpayers $56 million in savings without extending debt service payments.

Thanks!
ck

posted by Rich Miller
Friday, Aug 26, 16 @ 1:05 pm

Comments

High prices makes more money for those investors, hmmm didn’t our governor come from the investment world? You don’t think this mess could be planned do you?

Comment by Publius Friday, Aug 26, 16 @ 1:51 pm
Is it public record who buys the bonds? Are there any reporters anymore willing to look into this possibility

Comment by Publius Friday, Aug 26, 16 @ 1:53 pm
Publius, take a breath and remove your tinfoil hat. The state got a better deal than the last time it sold similar bonds.

Comment by Rich Miller Friday, Aug 26, 16 @ 2:01 pm
The rating agencies continue their charade that bonds backed by a portion of the state’s sales tax revenue are safer than ones backed by all the state’s tax revenues

Comment by Steve Schnorf Friday, Aug 26, 16 @ 2:07 pm
Publius,
If there were savings because these bonds were sold at lower interest rates than the bonds the state was holding, doesn’t that mean the bankers are making less money off of the people of Illinois?

Comment by Gone Friday, Aug 26, 16 @ 2:12 pm
Bankers pay taxes.

Comment by Ron Friday, Aug 26, 16 @ 2:34 pm
==The $573 million of securities the state plans to sell Thursday are secured by a stream of sales-tax revenue that’s diverted to investors, earning the deal the highest ranking from S&P Global Ratings. That’s seven steps above the state’s general-obligation debt, which is backed only by the government’s guaranty to pay what it owes.==

And when you pledge assets or revenue streams that would otherwise be available to pay GO bonds, you increase the risk of default on GO bonds, however slightly. This will increase the interest rate on future offerings, unless they are secured by their own revenue streams or assets. No magic bullet here.

Comment by Whatever Friday, Aug 26, 16 @ 4:52 pm