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* Danielle Moran at Bloomberg today…
Illinois sold $800 million of debt its first borrowing since the coronavirus exacerbated the worst-rated state’s fiscal woes, showing that its access to the capital markets remains intact even as investors demanded large yield penalties to buy the securities.
Bonds maturing in 2045 with sold at a 5.85% yield, nearly four percentage points above top-rated benchmark debt, according to data compiled by Bloomberg. That’s slightly under the 5.95% yield initially offered, according to preliminary wires viewed by Bloomberg, yet still more than double the penalty on its last sale in November, when debt due in 2044 priced at 159 basis points over benchmark. […]
“This is what every other lower-rated issuer or state, the Connecticuts, the New Jerseys, or anyone that has been waiting a little bit — this is a very good sign for them,” said Nisha Patel, a portfolio manager at Parametric Portfolio Associates LLC. “That the lowest rated state with a lot of speculation of losing their investment grade rating, the deal like this getting done, with this type of subscription signals to other issuers that the water is warm, you can come into the market and get a decent size issue done.”
The yield penalty investors are requiring shows how dramatically the coronavirus pandemic has affected investors’ views of Illinois’s bonds. Prices on previously issued bonds have tumbled sharply since March amid speculation that the steep economic slowdown may turn it into the first state to be stripped of its investment grade rating.
The sale will be used for capital projects and to fund an ongoing pension buyout plan, according to the Bond Buyer.
* Speaking of the Bond Buyer…
Federal Reserve leadership said their municipal short-term lending program will be up and running in a matter of weeks, not months, while municipalities forge ahead and price deals to a mostly receptive muni market.
In a Senate Banking, Housing and Urban Affairs Committee hearing Tuesday, Fed Vice Chair of Supervision Randal Quarles said he expects the Fed’s Municipal Liquidity Facility as well as its Main Street Lending Program to be open in a matter of weeks. […]
The Fed, since the creation of the MLF in early April has been releasing details over the past few weeks on how it will work, but it has yet to begin buying munis. The program will buy $500 billion of short-term notes from issuers. […]
“In 2008, the Fed didn’t take any action with respect to the municipal market,” said Michael Decker, senior vice president of policy and research at Bond Dealers of America. “They didn’t buy any bonds, they didn’t make any loans, they stayed completely out of the municipal market. So they are starting this up right from scratch and so I think that’s why it’s probably taking a little bit longer than some of the other facilities.”
posted by Rich Miller
Wednesday, May 13, 20 @ 2:07 pm
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The premiums make sense. It was nice to see the FED showing strong support for additional gov’t support, in particular through grant form.
Comment by njt Wednesday, May 13, 20 @ 2:16 pm
There is a cost to being last
Comment by Donnie Elgin Wednesday, May 13, 20 @ 2:28 pm
Illinois really needs to just go to market and say “this is the rate we are paying” and work with an underwriter that agrees to not accept deals above that rate.
The munibond market rates do not reflect risk. Compare AAA rated corporate bond default rate to state default rates and state credit ratings and it’s pretty transparent that the municipal bond ratings are meaningless.
Comment by Candy Dogood Wednesday, May 13, 20 @ 2:32 pm
Illinois really needs to just go to market and say “this is the rate we are paying”
Bonds trade internationally and upon initial offering, investors look to the credit agencies for a relative measure of risk. Once they begin trading then the market takes over investors/traders look at credit risk, default risk, interest rate risk, IL bonds are still some of the lowest-rated at BBB-. Bond prices also are impacted by the time remaining until maturity the YTM.
Comment by Donnie Elgin Wednesday, May 13, 20 @ 3:10 pm